In today's market, startups are raising venture capital funding at high valuations with seemingly little trouble.
Entrepreneurs think that raising money at a high valuation or with a high cap is a badge of honor, but raising money at a high valuation also prices you out of exits and makes it harder to raise follow-on capital.
But raising money at a high valuation comes with its own unique set of challenges; it increases the "Preference" (the private equity raised all gets paid back before Common shareholders, the founders and employees get a dime), and it adds increased pressure for performance to justify the price.
Founders saw opportunities to raise more money, frequently, at ever higher valuations, with less dilution.
At this price, Renren is valued at $5 billion, a high valuation for a company with 2010 revenue of only $76.5 million and operating income of $17.3 million.
An investor who has put in money at a high valuation and protected it with a liquidation preference may be less inclined to accept a good takeover offer than earlier investors, including the founders, who may have received shares at a much lower valuation.
It manifests itself in situations where some companies' financings get done fast, at high valuations and with very clean terms.
Many companies raised capital in the past twelve months at high valuations and with high burn rates, confident that follow-on investment would be available when needed, and at an ever higher price.
"They will go in with a high valuation and say 'I am spending a fortune on advertising and will get you the best price'.
"You can't sit here with a high valuation, when everything else is crashing around you," said Kathleen Smith, a principal at Renaissance.
