Startup Strategy for Unpredictable Times
Things change because markets are not logical; markets are emotional.
In an analysis featured on CNNMoney.com, Ben Horowitz lays out the specific challenges of raising capital and valuing startups in the current economic climate. In an eye-opening comparison, he looks at the price/earnings ratios (P/E) of all S&P 500 IT companies for the last 18 years. With this wide of a time span, one might expect some form of predictability or modest stability to appear. In fact, the results fluctuate so wildly that the average company with $10 million in earnings and valued at $210 million in 1995 would have seen its value gain $610 million and then lose $665 million by 2012. Horowitz goes on to spell out how such dramatic volatility can be navigated to achieve specific goals.
After, God willing, you successfully raise your round and it’s a down round or a disappointing round, you will need to explain things to your company. Â The best thing to do is to tell the truth. Yes, we did a down round. Yes, that kind of sucks. But no, it’s not the end of the world. We can probably re-price your options. If we took too much dilution, we will work with our new investor to make sure that every employee is still highly financially motivated. We are the same company that we were yesterday, and if you believed in that company, then you should believe in this one.
