The Down Round

Bill Gurley’s written an opus about the State of Silicon Valley and in it is a really crucial piece of information for those running businesses – whether they’re in Palo Alto or Peoria. Gurley talks about the need for a founder or CEO to display courage during a down-round and to make decisions for the long-term health of a business rather than the temporary saving of face.

Down-rounds occur for every company at some point. And I’m not referring to the raising of capital only. Down rounds are a good way to think about any rough patch in which a business finds itself – industry downturn, cash crunch, a failed merger or acquisition, a corporate investment that doesn’t pay off immediately, etc.

What do you do when you find yourself face to face with a situation in which your grand plans haven’t progressed in a linear fashion? Do you take a lifeline that allows you to act like everything’s fine? Or do you make tough choices and level with your partners, employees, investors and other stakeholders about the new reality?

Execs who are afraid to lead a company through tough times should not be leading a company at all. Gurley says that the best option many unicorn founders might have before them this year is to get themselves public – even if at a lower valuation, rather than do an up-round with “dirty terms” that favor a shark financier at the expense of the company down the road.

It is worth noting that stock prices go up and stock prices go down. There is not a single high-profile public company that has been able to avoid time periods where their shares underperformed. Amazon went from $106 to $6 as a public company. Salesforce went from $16 to $6 and stayed below $10 for many months. Netflix went from $38 to $8 in six months. Remember Facebook’s first six months as a public company?

If you cannot handle a down valuation you should seriously consider abandoning the CEO position. Being a great leader means leading in good times as well as tough times. Taking a dirty deal is jeopardizing the future of your company, solely because you are afraid to lead through difficult news.

I highly urge you to head over and read the whole thing at some point today, it’s loaded with important points for investors, founders and employees of any business.

Source:

On the Road to Recap (Above the Crowd)