Editor’s Note: This post was originally published on Seattle 2.0, and imported to GeekWire as part of our acquisition of Seattle 2.0 and its archival content. For more background, see this post.

By Rebecca Lovell

So I hate being the bearer of bad news, and I’m a horrible bad cop. Judging a competition this past April, one of my colleagues suggested I drop the hammer, and upon witnessing that sorry attempt reflected “that was a velvet hammer covered in bubble wrap.” So be it.  Instead of being the bad guy, I’m here to deliver a public service message on valuations.  I’m no lawyer (and I’m certainly no angel), but in my day job I do have access to a veritable goldmine of data, and will share the following. 

Shave and a haircut.  For the three new investment opportunities presented to our membership in October, valuations took a 50% haircut compared to the deals we reviewed January-September.  These companies came to us with attractively priced deals; all three were headed by experienced CEOs (two of the three were serial entrepreneurs), all were post-product, and generating revenues (not vc-fundable revenues, but revenues nonetheless).  Even in September these may have commanded a $3M pre-money valuation, but in October the deals all came in at or under $2M pre.  That’s right: $2M or less, all offering preferred stock equity rounds.  Early returns suggest two of these three will receive some level of funding, which is consistent with our average this year to date.   That valuations are coming down is no surprise; but for some additional context, see Ron Conway‘s thoughts on the topic– he’s argued that in any economy, most true startups are worth about $2M.   And if you’d rather not take advice like this from an angel, check out this entrepreneur’s blog, suggesting  that for the greater good, entrepreneurs’ valuation expectations need to converge with those of the investment community.  

Convertible notes are so five minutes ago.   This financing instrument has been unpopular amongst area angels for some time. In part,  the class of investors taking the highest risk don’t get to enjoy the upside opportunity should things go well (a 20% discount is no match for an up-round at 4X the first). Much ink has been spilled on this topic; here’s a post from the Kauffman Foundation, and some reflections from our own members (attorneys, VC’s and angels).   Now more than ever, a bridge note is perceived as a “bridge to nowhere.”  Convertible debt is predicated on imminently obtaining an institutional (likely VC) round of investment, and today our investors find that scenario increasingly unlikely. 
The take-away?  If you’re raising money now, raise what you can but at a lower pre-. Keep your burn low, hit some milestones, get through this mess,  come back with a higher valuation and everyone can win.  So if you come to us with a $6M pre- and a pre-revenue company, I won’t tell you to step away from the crack pipe, but I will implore you: help me help you. 
Note:  Barring the so-sappy-it-makes-your-teeth-hurt “you complete me,” the author believes that Jerry McGuire is a veritable goldmine of movie quotes. 
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