Startup founders deny venture capitalists more money

  • Start-up founders explain why they are willing to accept VC termsheets at a lower valuation.
  • One founder explained why taking less money from Sequoia led to a funding “halo effect” later on.
  • Another explained why they decided the right board member was more important than a higher rating.

In the fall of 2019, Shadiah Sigala, the founder of Kinside Child Care Market, looked at a conditions sheet. It was the best investment offer she had received, one that valued her startup at $ 1.5 million more than the others.

She refused it.

Sigala instead chose an offer from Initialized Capital at a lower valuation. His decision came from the company’s reputation, its understanding of the child care market and its “chemistry” with its lead investor, the initial general partner Alda Leu Dennis.

“I want to work alongside someone who I feel I can be myself,” Sigala said. Three of her top four investors are also working mothers, like her.

Insider spoke to 26 new and advanced founders and investors who told us why more founders are willing to turn down money. For many founders, helping with fundraising, business strategy, and recruiting their VCs was a huge draw. And for others, it was about whether an investor was the right choice for a seat on the board of directors or in the same city.

‘The Sequoia shed’

Sigala’s Choice is an example of a term known to VC industry insiders known as “Sequoia Discount”, also known as “Sequoia Halo” or “Pixie Dust Effect” .

This is when a VC firm comes up with deals that are priced below a startup’s perceived value and what other VC firms are offering. For the startup, having a leading venture capital firm on its capitalization table could lead to better trading conditions in later rounds.

It’s a tactic that’s often used, people familiar with the company told us, because Sequoia is so powerful, with a history of supporting companies that are changing the industry, from Apple to Airbnb.

“The reason that companies like Sequoia can undermine other companies is that the companies funded by Sequoia turn out to be extraordinary. Sequoia’s reputation is a very powerful thing to add to the company,” said Roy Bahat, director. from Bloomberg Beta, a early stage venture capital firm.

A prime example was when Amira Yahyaoui raised $ 13 million in Series A last March for her startup Mos, which helps students with financial aid.

The funding round was fiercely competitive, but Sequoia edged out a handful of other top companies who wanted to invest despite being several million dollars below the highest bid.

Yahyaoui said she chose Sequoia because the firm’s partner, Jess Lee, was “obsessed” with the product and understood every detail of her business.

“It wasn’t just Jess, but I also interacted with eight GPs in Sequoia, and they are able to really explain what we’re doing, even though they have no interest in Mos,” Yahyaoui said. .

She also said she knew of founders who accepted the biggest check at higher valuations but didn’t get much more than money.

“The second you need something, you can’t find help because you’ve accepted the check and not the relationship. It’s not all about the money,” he said. she declared.

Less now, later.

Sequoia is not the only company to use this tactic. Benchmark, Accel, DCM and other leading companies know they can win contracts without having to shell out the most money, said several people familiar with the negotiating process of these companies.

“The brand matters,” said Dennis of Initialization.

That’s because these companies carry a “seal of approval,” which carries weight with other investors, Sam Lessin, general partner at Slow Ventures, recently wrote in The Information.

And that means a startup can often raise more money on better terms in later rounds due to this so-called halo effect of having a brand like Sequoia on your capitalization table.

After choosing Sequoia as the lead investor, Yahyaoui said he experienced this firsthand. The day after the funding announcement, her inbox was full of interested investors, which opened the door to many more opportunities for her if she decided to raise funds again.

As for the success of the Sequoia halo in this sparkling market, Sequoia was the third most active investor in the second quarter, with 62 transactions, just behind Tiger Global and Andreessen Horowitz, according to CB Insights.

Location, location, location

Examples abound these days of founders choosing less money and lower valuations from big companies.

One reason: The bullish venture capital market is bursting with cash, where deals sometimes get delivered in less than 24 hours. The founders are swimming in multiple sheets of terms among a sea of ​​investors eager to increase their bids to win a deal. The founders are in charge of the proverbial.

There is also the looming fear and advice conveyed by experienced founders, that if a startup accepts the highest bid, it will be considered overvalued and will then be forced to drop, which means selling shares at a price. lower than the previous one. tower.

It’s a “kiss of death” scenario, so founders are often advised to take realistic ratings, said Jason Samuel, CEO of Mercemur, an e-commerce platform.

For Michael Vega-Sanz, access to a reputable venture capital firm in his hometown sealed the deal. In July, Lula, an insurance infrastructure startup in Miami, announced that it had raised an $ 18 million Series A raised by Founders Fund and Khosla Ventures. It was a hotly contested round with more than 40 companies clamoring to win the deal, Lula co-founder Vega-Sanz said.

A particularly tempting offer came with more money at a better valuation from Earnest Sweat, an associate partner at GreatPoint Ventures, a venture capital firm in San Francisco. Sweat was someone the Lula co-founders believed they could work with for many years.

But Vega-Sanz and his co-founding twin brother, Matthew Vega-Sanz, decided to decline GreatPoint’s generous offer and go with Founders Fund and Khosla Ventures.

Ultimately, the decision came from Founders Fund’s strong presence and proximity to Lula’s offices in South Miami. Founders Fund partner Keith Rabois and senior Delian Asparouhov, among other prominent Silicon Valley venture capitalists, recently left the Bay Area for Miami.

“We meet with Delian or someone from the Founders Fund team twice a month, and our board meetings are also in person,” he said. With the other companies courting Lula, he would have to use Zoom or FaceTime.

Optimize for the partner, not for the price

When Finbarr Taylor, CEO of e-commerce software startup Shogun, raised funds for his Series A in 2019, it sparked the interest of several companies.

One company in particular was willing to pay up to 50% more to participate in the cycle, Taylor said. But that higher price meant higher expectations. During a negotiation meeting, an investor told Taylor he is expected to increase the company’s growth five-fold over the next year.

But Taylor was looking for more than money. He wanted to find the right board member for his company, which is typical of a company that throws a Series A round. After some thought, Taylor decided to go with Brett Gibson, a general partner at Initialized Capital. who had worked at Y Combinator. Taylor had also worked at the accelerator as a software engineer and completed the program’s winter 2018 course.

“I think if we had been in the mindset to optimize the evaluation, we could have said the right things and got a much higher list of conditions,” said Taylor. In the end, he decided that a long-term partnership was more important than the price. “We optimized for a partner we knew and trusted,” he said.

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