The Arguments For Not Raising at a Unicorn Valuation

So for a while, unicorns took a bit of a breather.  With the stock market for tech stocks and cloud stocks in a big decline in 2022, unicorn production slowed down.  And what had become a rite of passage in 2018-2021 … “Becoming a Unicorn” … seemed to recede as a critical milestone.

But we’re back.  AI has refueled unicorns, and 100x, 200x+ deals for the very hottest, fastest growing AI B2B companies.

And at the same time, the best in SaaS have just kept growing the past few years.  Maybe have “earned” unicorn status at more modest revenue multiples simply by crossing into nine figures in ARR with strong growth.

Now if you’re in the earlier stages it may sound silly to be talking about if it’s a good idea to raise at a $1B+ valuation or not.

But it’s still something worth discussing.  In fact, at SaaStr Fund, I’ve had several discussions in the past weeks with fast-growing investments sitting on valuations in the $250m-$350m range (still high by any normal standards 🙂 that are getting interest at potential unicorn valuations.  At relatively high ARR multiples.

A few thoughts:

The “Good” Parts of Raising at $1B+

#1.  If You Need The Cash, Then Becoming a Unicorn Is The SImplest Way to Raise It.

The math is the math.  Selling 10% of your company at a $1B valuation raises $100m.  If you need it, and you can get it, then that’s the answer.  If … you need it.

#2.  Raising at $1B Removes a Lot of Exit Options, But It’s Not Quite as Dramatic As You Might Think

Loom raised at $1.2B+, and sold for $1B.  In the recent SaaS IPOs, Klaviyo and OneStream both IPO’d at very strong valuations, but below their last rounds.

#3.  Unicorn Rounds Can Create a Lot of Liquidity.  And That’s Harder to Find These Days.

Hot Unicorn rounds often include material liquidity for employees, often alllowing them to sell 10%-25% of their vesting shares.  And some for early investors too.  With IPOs take 12-14+ years or longer, and Big M&A in scope ways in hibernation mode, this helps a lot.

So if you are in a position to pull off a Unicorn round and #1-#2-#3 matter, probably do it.

But …

There are significant downsides to raising at $1B.  Especially today:

#1.  It’s Going to Be Very Hard to Make Those Unicorn Investors Money Today.

Public SaaS and Cloud valuations average about 5x ARR today.  Yes, some outliers like Samsara trade at 20x ARR and Palantir higher.  But even 10x ARR is hard to get in the public markets.

If you raise at $1B at $60m ARR, how do you make investors 3x their money or more?  Net of dilution, that’s probably a $4B+ valuation.  Are you really sure you can IPO at 4x your unicorn price?  Take a look at the public comps today.  Even if it’s possible, do you want that pressure?  It builds.

#2.  You’ll Start Attracting The Wrong People to Join You

Once you get hot, this starts to happen.  The mercenaries start to show up.  It gets worse when you raise a mega-round.  Everyone sees it, and sure, it seems good for recruiting — at first.  But it also brings out folks with seemingly strong resumes that are just in for a quick win.  And the Pirates and Romantics may begin to feel it’s just not their place anymore.

#3.  Internal Inflation Will Accelerate.  Everything Will Get More Expensive.

Everyone will need more reports, more budget, more everything.  Maybe that’s OK.  You have to scale.  But if you can hold off longer before this inflation and inefficiency sets in, it’s usually better.

And finally, whatever you do — we wary of the advice of your VC investors on raising a high priced / unicorn round.

Why?  Because 90% of them — not all, but 90% of them — are very motivated to get “mark-ups”.  To get a higher paper valuation for their investment.  If a VC owns 10% of your startup at a $100m valuation, their investment on paper is worth $10m.  If you raise next week at $1B, their investment on paper is worth $100m.  That makes them look a lot smart, and lot a much better investor.

So the advice here is often anywhere from a little to a lot biased from you VCs.  But it’s almost always biased.

Even I’ve changed here.  

When I started venture investing, I quickly got to 10x on paper.  It was on top of very rapid mark-ups, and I looked like a genius-to-be.  Those investments did mostly end up being good ones, with billion+ exits for Salesloft, Pipedrive, and more.  But fast forward to today, and all I care about is a great outcome in the end.  I’m much more patient.  And I no longer care about those mark-ups, and worry more about the impact on culture, team, spend, and expectations.