If you’re a startup looking to raise money, the regular way to go about it would be to find new investors, tell them about how cool your startup is, share some numbers that show how much time people are spending on your app or whatever. If the investors are happy, they’ll commit some money.
Next, you go to your old investors, those that gave you money when you were younger. You tell them about how you’ve just secured funding from new investors and also ask them to chip in a bit for your round.
The purpose of going to the new investors was to actually get the money you need. They are the ones that “lead” the funding round. The reason you go to your old investors is because the new investors are usually happy and feel safe if the old investors participate again. What you (and the new investors) need isn’t their money but their vote of confidence. The old investors are saying to the new investors “we’ve been with this kiddo long enough to trust him, look here’s some more money”.
What happens if you’re a startup and the market that you’re in is in total disarray, your revenue flat, your losses up 14X, your auditors have threatened to resign, and your general reputation is just bad… but you also need to raise some money?
If you go to new investors, they’ll probably ask you uncomfortable questions about your financials and whatever else in the news. Maybe ask for a discount in your company valuation. So you just go to your existing investors instead.
From Moneycontrol last week:
Edtech unicorn Byju’s has raised $250 million in a new funding round from existing investors including Qatar Investment Authority (QIA) at a $22 billion valuation. This comes a week after the company announced that it would be laying off more than 2,500 people.
New investors offered the company a valuation of $11-12 billion after its results were released last month , but Byju’s did not raise money at that valuation, a person directly familiar with Byju’s fundraising plans told Moneycontrol.
Over the past 12 months, secondary sales of Byju’s shares have happened at a valuation between $16 and $17 billion, while all primary fundraises have happened at a valuation of $22 billion since March of this year, according to the person cited above. A little more than $250 million was raised in primary funding during this round, the person added.
Byju’s needed some cash. New investors wanted a 50% discount. So Byju’s preferred going to existing investors and raising $250m from them instead.
If you’re an investor in a company and the founder comes to you asking for more money, your general happiness level depends on three things:
- The obvious: your investee company’s growth numbers and financial health
- Market enthusiasm in the specific space the company operates in
- Maybe the most important in the early-stage investing world—if the founders have managed to get other investors on board
If you’re a Byju’s investor, you know that (2) isn’t on your side. Enthusiasm to invest in tech and especially edtech is down. 2 years ago when students replaced school with screens, venture capitalists figured that this was the future. Once schools started, students went back. So did investor sentiment in edtech. You also know that Byju’s isn’t in the best of financial health. Revenue is flat, expenses are up, etc, etc. So (1) isn’t on your side either.
Now imagine when the founder tells you that they couldn’t really find a new investor without giving them a massive discount. You’re going to be quite unhappy.
Startup investing has a large social proof element to it. You might think that finance is all about numbers and statistics and spreadsheets, but when you’re making multi-billion dollar bets on companies just a few years old, there aren’t always a lot of numbers to analyse and outside validation holds a lot of value. No one wants to be the sucker holding the bag at the end (not alone, at least).
You’re now faced with a choice: do you fund this company and help it survive—or do you refuse and look at while it slowly dies? If the company dies, you lose your entire investment. It’s a bit of a no-brainer to just put in some more cash into this company. To date, there is $5 billion (more than ₹40,000 crores) riding on Byju’s. You don’t want 5% of that to be the reason it dies!
But there is no way in hell you wouldn’t insist on a discount.
When news outlets reported last week that Byju’s raised $250 million they cited an anonymous source to say that it was at the same $22 billion valuation as their last funding round.
But the company itself hasn’t officially said anything. Normally companies that raise money love telling the media about their latest valuation. There is an innate joy in likening your company to fantastical beasts. But not so much Byju’s this time 4. Who loves telling others that your company is running a fire sale on itself?