This article appeared before at TechCrunch.
Crumbdown is back – and I’m keeping a list.
With the dotcom crash at the turn of the 20th century, startup valuations plummeted, burn rates became unsustainable, and startups quickly ran out of cash. Most existing investors (those still in business) saved their money and held off on the next round until the rubble was gone.
The exception is investors who are the bottom feeders of venture capital businesses.cram” Their company. They offered desperate founders more cash, but insisted on new terms, rewriting all the old stock contracts that previous investors and employees had. In some cases, it was “pay-to-play” for existing investors. This means that if you do not participate in new fundraising, you will incur losses. Other times it was just accept or leave. The new terms are: Some even argued that all previous preferred stock must be converted to common stock. For common shareholders (employees, advisors, former investors), a crumb down is a big middle finger because it involves a reverse split. previous value.
(Crumdown is different from Crumdown down roundA down round is when a company raises capital at a lower valuation than the company’s valuation in a previous funding round. But no massive reverse splits or terminology changes. )
they are back
Crumbdowns never went away, but the flood of capital over the past decade meant most companies could raise another round. Startups that can’t find product/market fit and/or can’t generate enough revenue and/or lack patient capital are competing for money.
Why would VC do this?
VC gives all sorts of reasons. Venture capital is beki business, not ‘save every penny business’, ‘it’s just a good business’, or ‘we are opportunistic’. On the one hand, they are right. Venture capital, like most private equity, is an unregulated financial asset class. But the simpler and more painful truth is that it is abusive and usury.
Many VCs don’t have a moral center for what to invest in or what to do to maximize returns. On the one hand, the same venture capital industry that brought us Apple, Intel, Tesla, and SpaceX also says teenage addiction is a viable business model (Juul) and destroying democracy (Facebook) is a big deal. I see it as an investment. And instead of society shunning them, we celebrate them and their return. Equates the VC narrative that “all VC investments are equally good” to “all investments are equally good for society”.
W.Will any founder agree with this?
No founder is ready to see their company collapse under them. He works desperately for 100 hours a week, and panics more and more when he knows that unless he can find additional investment, he will be without years of work. You cannot sleep and try not to fall into utter despair. If an investor (often one of her existing investors) brings you a proposal to keep the company alive and out of utter despair, you grab it. When you hear the terms, you swallow hard and realize it’s going to be a startup again.
But there is one more important thing. To make it easier for you and a few key employees to swallow the cramming, they promise to get you back on track (by issuing new shares) in the newly capitalized company. Heck, all the previous investors, employees, and advisors who trusted and bet on you get nothing, but you and a few key employees are fine. Suddenly, deals that seemed unpalatable now sound reasonable. Start rationalizing why this is good for everyone.
You failed to make ethical choices and ruined your reputation forever.
Crumbdown doesn’t exist without the founder’s consent.
stop crumb down
In the 20th century, terrorists took hostages from many countries other than the Soviet Union. why? The West desperately negotiated with the terrorists, offering concessions, money, and prisoner exchanges. soviet union? Terrorists once took Russians hostage. The Soviets sent their condolences to the hostage families and never negotiated. The terrorists found it futile and focused on Western hostages.
If founders stop negotiating, VCs will stop playing this game.
you have a choice
In the panic trying to find money, founders forget they have options. walk awayClosing the company and starting another. Don’t justify how bad the choices are or convince yourself you’re doing the right thing. you’re not.
After a new round of funding, most employees are likely to see little to no years of work. It’s turned around some of the tight spots (I can’t think of one), but given that it hasn’t found enough customers to date, it’s never going to be a successful company. Your cramming investor may sell your technology for components or use your company to generate profits for other investee companies.
You think cramming money is your lifeline, but they gave you a noose.
time to think
When investors put pressure on you and your money runs out, it’s easy to think this is the only and best way to go. Recognize that you need time to contextualize the current crisis and visualize other optionsTake a break and imagine the things you can’t imagine right now. What will life be like after the company ends? What else have you always wanted to do? What other ideas do you have? Is it time to reconnect with your spouse/family/others, de-stress and reclaim a part of your own life?
Don’t lock yourself in your head thinking you have to solve this problem yourself. Get advice from friends, mentors, especially early investors and advisors. Permanently ruining relationships (and reputations) by hearing that an early investor or advisor decided to crumb down when they asked to sign a decision that had already been made. There is nothing worse than ensuring
Being able to evaluate alternatives in times of crisis is a lifelong skill. Life is short. Know when to double, know when to walk away Critical skill.
In the long run, a new venture that leverages your experience and knowledge to reach your goals again will serve your employees and the venture ecosystem better.
The winner leaves the field with what came with them.
lesson learned
- Crumbdown is done by VC bottom feeder
- Using “unfair advantage” to contribute to the toxicity of the startup ecosystem
- Founders often think they need to rationalize and cram, “I can’t think of a better idea. I’ve put so much time and effort into this startup. I just don’t have the energy to do it again.”
- Founders justify that it’s good for employees
- take time to consider alternatives
- Don’t get stuck in your head thinking you have to solve this problem yourself
- You are burning the very people who were your early supporters
- walk away
- You can hold your head high and start up again
- PS If you’re ready to walk away, it’s quite likely to be a much better deal (if you want one).
Filed Under: Venture Capital |