Jan 2, 2019 · 25m · a16z
a16z Podcast | Raising Money and Valuing Startups -- What Happens When Things Don't Go As Planned?
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In this episode of the a16z podcast, host Scott Kupor and startup CEOs Danny Shader and Danielle Morrill examine the dynamics of current startup valuations, structured deal terms, and fundraising strategies. The panel offers crucial lessons on navigating market cycles, managing capital buffers, and aligning employee incentives for long-term survival.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. How this is scored →
The host as informed peer 5.5 Guest teaching 3.5 Guest disagreement 2.1 The host pushing back 1.9
speaking balance: gold is the host, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 25:05 Danny reframes the host's concluding summary
Danny directly interrupts Scott's attempt to summarize the episode takeaways, explicitly saying 'let me try to characterize it in a different way' to replace Scott's summary with his own point.
Hardest push from the host ▶ 13:42 Scott presents offensive fundraising as a counter-perspectiveScott pushes back against the premise that high late-stage valuations are merely investor-driven inflation, proposing that founders intentionally raise massive capital defensively to build a margin of safety against market shifts.
Biggest teaching moment ▶ 5:53 Danielle points out a16z's own fund strategyDanielle directly educates Scott on how new venture funds operate by citing Andreessen Horowitz's own initial fund strategy as the archetype others copy to buy portfolio vanity logos.
The host holds their own ▶ 15:44 Scott shares LoudCloud's $820M valuation experienceScott displays deep operational background by recounting how Ben Horowitz and he managed employee disappointment after raising $120M at an $820M post-money valuation during the 2000 tech bubble.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | The host as informed peer | Guest teaching | Guest disagreement | The host pushing back | Why |
|---|---|---|---|---|---|---|
| Structured Deal Terms and Liquidation Preferences | 6 | 2 | 1 | 2 | Scott demonstrates clear venture expertise by detailing structured deal terms like full ratchets and price resets introduced by hedge funds and buyout firms in late-stage deals. Danny adds historical context about surviving past bubbles without conflict. | |
| Late-Stage Investors and Massive Capital Deployment Pressure | 5 | 4 | 2 | 2 | Danielle educates Scott on how non-traditional investors force larger round sizes to secure brand-name logos. She cites Andreessen Horowitz's own early strategy as the playbook new funds are imitating. | |
| Exit Bottlenecks and M&A Constraints at Extreme Valuations | 6 | 4 | 3 | 3 | Scott posits that high valuations constrain M&A options by eliminating potential acquirers. Danny politely rejects Scott's premise, stating he doesn't worry about exit constraints and even attempts to signal lower pricing when proposals get too inflated. | |
| Capital Horizon Planning and Blurring Early-Stage Boundaries | 4 | 3 | 1 | 1 | Danny and Danielle discuss how early-stage founders often lack long-term capital planning. Danny notes that Danielle's $4M seed round would historically be considered a Series A, highlighting the blurring definitions of early stage capital. | |
| Underestimating Capital Needs and Offensive Fundraising Strategies | 7 | 2 | 1 | 4 | Scott outlines how founders routinely underestimate capital needs and presents a strategic counter-framing: raising large amounts at high valuations acts defensively to create a margin of safety against macro downturns. | |
| Managing Employee Expectations and Equity Incentives | 7 | 3 | 1 | 1 | Scott shares a detailed personal anecdote from his time at LoudCloud with Ben Horowitz regarding employee disappointment over an $820M valuation. Danny and Danielle discuss employee alignment and alternative compensation models. | |
| Generational Mindsets and SaaS Model Resilience | 5 | 5 | 3 | 1 | Danny provides a stark assessment of younger founders' overconfidence, warning that many lack memories of past crashes where tax liabilities from option exercises drove founders to bankruptcy. Danielle highlights SaaS model resilience as a positive structural shift. | |
| Key Takeaways and Podcast Conclusion | 4 | 5 | 5 | 1 | As Scott attempts to summarize the episode takeaways regarding milestones and next rounds, Danny cuts in to recharacterize the core lesson, arguing that long-term planning and the end state are all that matter. |
Statements from this episode (17)
Morrill: Investor Competition for Rare Unicorns Drives Up Startup Valuations
“And then I think you're also seeing these really massive rounds because what I'm seeing is really competitive deals where investors feel like there's not that many super Unicorn potential startups. They want to pile into those, and so that drives up valuation …”
Shader: Structured high valuations harm employee common equity long term
“And it seems like that has really negative implications for the new common shareholder employee who joins, which, you know, I'm old fashioned, but that seems like that's not necessarily an interest of the company long term.”
Kupor: Hedge funds and buyout firms structure late-stage deals with ratchets
“Certainly, you know, the ones we've seen, particularly where you start to get to either, you know, the hedge fund community, or in some cases, you know, buyout firms who are now kind of doing these later stage private rounds, you definitely see more structured…”
Shader: Overreaching for valuation creates severe risks unless future rounds guaranteed
“I don't know that stretching for evaluation is a great idea. Unless you have incredible certainty on your deal. And you know, absolutely know that there's going to be another round behind it at a higher valuation, either because you're pressing about the overa…”
Morrill: Late-Stage Investors Push $100M Rounds to Deploy Excess Capital
“What I'm seeing is a lot of the pressure is coming from that side. It's like, well, we don't want to deploy thirty million dollars, we want to deploy a hundred million dollars, because We don't have another, enough places to deploy its capital.”
Shader: Overvalued payments startups risk crashing the broader market
“My biggest fear just as an entrepreneur trying to run things rationally is that some of those guys are going to crash and burn and drag the entire rational segment of the market down with them.”
Shader: I actively attempt to lower investor valuation offers
“When people have proposed things that are sort of too high, I've tried to signal bringing them down, which is a delicate Balance.”
Danny Shader: Over-promising during fundraising breaks trust during crisis
“Nothing will set up that relationship to be bad during bad times as if you over-promised when you were raising money and then disappoint, because now you've broken this bond of trust you need when you're, you know, weathering the inevitable storms that are goi…”
Morrill: Mattermark operates without a board of directors
“Raising these big seed rounds, so we don't have boards for a really long time. Like, I don't have any board members, so I go to my advisors, and I'm trying to work with them and think through a lot of these questions with them”
Kupor: Startup founders systematically underestimate their required capital
“From the perspective of the deals that we see, I think almost to a fault, everybody historically underestimates how much capital they will actually need to get to either, either the next milestone or to an exit.”
Kupor: Startups stretching on valuation should maximize capital taken
“If you're going to stretch for valuation, you better take as much money as you can possibly get at that valuation to give yourself way more running room than you ever think to kind of insulate yourself from macro changes that might kind of impact the financing…”
Shader: PayNearMe intentionally located away from transit to screen candidates
“To the extent that we even do things like we don't have an office near a train station, right? Intentionally, like we're sort of self screening for that.”
Morrill: Hopping between mid-stage startups is a smart career tactic
“Actually, you can find people that just hop from, you know, mid-stage startup to mid-stage startup as pretty much a career tactic, which I think is pretty smart, actually.”
Morrill: Overhyped equity options create severe retention crises during repricings
“It's almost like we've taken stock options and we've hyped them up more than we should have, because then you do have this trust problem where if you do have to do something for the survival of the company, Now you're telling a couple thousand people, hey, we …”
Danny Shader: Tech market boom will end badly for overconfident workers
“I think this party ends and it will have an ugly end and I'll, and there will be people who have an expectation for what their lifestyle will be and have dialed in a bunch of very important life decisions to that who are going to not be happy with what happens…”