If you’re an insider, you know that money is pumping through the veins of Silicon Valley minded investors right now. Combine low fed interest rates and an already wild stock market, and you have LPs plowing money into VCs who are plowing money into startups. Many founders see the increase in capital available and try to raise more than they need to, because they are able to justify the valuation in this very frothy market. It’s not uncommon to see $30M-$60M post money valuations with pre-revenue startups on a weekly or daily basis for many investors.

If you’re a founder planning an upcoming fundraise, you may be wondering what strategy to take. Raise what you need and get back to work? Raise as much as possible while the market is hot? Skip raising until things settle down? I’m not here to tell you what to do, but I am here to send a warning to those raising at massive valuations.

Right now, we are on a market high. There is so much money in the ecosystem and everyone think's they’re the world’s greatest investor. Few are planning for a correction in the market, where valuations come back to “normal”, whatever that means. No one knows if this is going to happen, but it’s worth going through some modeling in case it does (and it probably will).

What Happens If The Market Turns?

If you raise $8M at a $40 post money valuation at the top of the market, you need to be prepared to be raising your next round in the middle of a market downturn. If you take all you can get when it’s easy, you will need to have flawless execution to match those expectations if the market goes sour. The investors who invest at the seed will want their markups, regardless of the state of the market when you raise the next round. If a market downturn happens, there will be very little room for error since you set up such high expectations with your initial valuation. The chances of a down round are quite high in this scenario.

This is why raising at a more reasonable valuation in a booming market could yield better long term business value and put less stress on you and your team if the market turns. Instead of needing to hit a $80M valuation in a down market, you could lower your expectations and only raise at a $5-$15 post money valuation now, which sets you up to only need $20M or $30M valuation for your next round.

You might be reading this and think “Mat, we are going big because we know we’re going to execute flawlessly.” If you feel this way, good for you. But there are some things you can’t control, like the market and the market’s impact on your customers budgets and spending. By going a little more conservative in this current market, you’re giving yourself the flexibility to struggle in a market downturn. Thinking you’re immune to market downturns is stubborn at best and irresponsible at worst. You have been warned.

I want to state the obvious here which is the market is only booming for a certain type of founder and a certain type of investor; Insiders. I am well aware most founders are actually struggling to raise even small rounds right now. I am trying to solve this problem every day. Even if that is an accurate depiction of most founders, the above post does ring true to many of my readers, and I think many of them will get value out of it. As always, there are far more work to be done so we can get more founders funded across the board.