Dangers of Being Too Good Looking . . .
Being too good looking means that no one will take you seriously plus everyone will only either want to be your friend or sleep with you. . . life will be so hard cause some regular looking people that you might like will automatically not approach you cause you are too hot . . . . So goes Jeremy Liew’s argument against entrepreneurs raising cash at too high of an valuation 
Jeremy spent yesterday trying to convince the world of “Asymmetric risk and the dangers of too high a valuation”. I have to take a step back to say that Jeremy has one of the most practical and useful blogs out there for entrepreneurs, but this time I would have to disagree.
On the other hand, if she raises at a valuation that is too high, she runs the risk of a future “down round“, or even worse, being unable to raise more money at all. Valuation is always based on some combination of past performance and future potential. When valuations creep up and are based more on future potential than past performance, more pressure is put on the company to hit its potential and justify its valuation. If things don’t go to plan, when the company next needs to raise money it may not be able to justify its past valuation at all.
There is such a things as too much of a good thing. Raising too much money means that entrepreneurs might have a huge liquidation preference to deal with and the investors will have an incentive to push the entrepreneur towards taking bigger and bigger risks in order to justify the return on the huge investment. This, however, has nothing to do with “too high of a valuation.”
Down rounds happen when the companies’ current value (when the entrepreneur is looking for financing) is lower than the last time he/she raised money. Usually this happens for a few reasons
1) multiples compression of the entire industry - such as a NASDAQ crash
2) business prospects turned south for the company (revenue flat or even worse, decreases)
3) Series R+1 investor values the company at a valuation lower than Series R investor (a rare idocyncratic issue thats not really systematic)
Jeremy is talking about (3) but the solution for entrepreneurs caught in this situation is NOT to seek a lower valuation to protect one self but actually raise more money with the higher valuation.
The solution in this case, where the entrepreneur raised $1.5m at a $30m valuation, the entrepreneur should have raised around $10M instead. Thus he/she would have enough cash to run and grow the business for a while (atleast 18-24 month) to hit the next milestone (adoption, new features, revenue etc) so that the company can “catch up” and pass the original $30M valuation (or post money $40M) which is admitedly a little high for the stage. Granted, sources that can put together that amount will most likely be VC’s who would not have put the valuation at $30M so the valuation will naturally compress a little bit but atleast not because the entrepreneur decides to throw money away.
Maybe the better advice (which Jeremy might actually mean to say) is that entrepreneurs should not jump at an investor simply because of superior valuation, there are other financial terms within the investment that might be equally or more important (liquidation preference for one, implied exit multiple for another).
My general theory on raising captial goes something like this. . .
1) go for highest valuation
2) but dont be afraid of dilution, raise a much as you can
3) keep liquidation preference at no more than 1.5x - reduce round size if you have to to get this number down
4) make sure you are raising enough money to hit the next financialy projectable milestone in your projections + 6 month
if you do all 4, the final result would be that dilution would naturally be reasonable while maximizing the success rate of the company (ie there is already so much operating risk, you want to take the financial risks to zero as much as possible as long as your founders equity is protected). Also there are other sneaky terms you have to be careful about but thats outside the scope of this post
