Most of the rounds we’re doing, are being immediately followed on by another round at a step up from the last.
Often, we are committing to a company, and right after we sign the term sheet – the company is starting to get offers at a higher valuation.
In a couple of cases, the new terms have been attractive enough such that we’ll have signed a TS with a company, and before they close (with our permission) these companies have been signing new term sheets at even higher valuations that close just after our money does.
This used to happen from time to time (I’m sure for any company that receives a TS from Sequoia, this happens almost immediately). But the frequency with which it’s been happening recently has been pretty surprising.
And I think it’s because price discovery has been harder than ever.
Investors are trying to recalibrate where seed valuations should be. $100B is the new $10B. $10B is the new $1B. Does that mean ultimate outcome potential for all these companies is higher, so valuations can move up with it? But are those public market values realistic? Are we all using comps, but the comps themselves are totally unrealistic and being messed around with by market structure? Not value?
Does that mean a lot of seed investors can shift their mandates a bit with more flexibility? Does that mean we should start participating in these double seeds?
And founders are getting put into a tight spot. They accept terms from us, and immediately are being offered something higher. Our response, in part is that, if we hadn’t offered the terms, it’s not obvious that the next investor would have either. Or it’s not clear what their initial price floor would have been – and perhaps they’re just using ours.
Either way, it’s a weird dynamic for everyone.
It’s hard to say no to the money though – it extends runway, isn’t crazy dilutive, is an immediate markup and puts multiple institutions around the table in the event the company needs a bridge… it also shows signal, and makes the series A a bit more competitive, saving dilution on the back-end.
But it’s weird.
I think a lot of investors are going to take the next few weeks to sit down, digest, and try to recalibrate on where prices really should be.
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