We recently looked into a company in the US. The company’s Series A round was heavily oversubscribed and unfortunately we weren’t able to participate.
The company saw such great demand from investors that, less than a week after the equity round was completed, it decided to raise an additional convertible loan to accommodate this demand. The only problem is that the cap on the convertible is 3 times the original pre-money valuation of the equity round, and over 2 times the post-money valuation. There has been no change in the company’s fundamentals to justify such an uptick in less than a week. We therefore decided not to participate.
I don’t blame the founders for their strategy. They’re doing what’s right for the company and if I was in their shoes I would do the same. Although I don’t know how much they’ll be able to raise given the terms of the convertible loan, they’re simply responding to supply and demand.
There’s a lot of capital in the market, some of which is price sensitive and some of which isn’t. The price insensitive participants are likely those which are investing for the first time and therefore haven’t learned the painful lesson that price matters. Their actions are governed by a fear of missing out, and that’s exactly what they did in this company’s equity round. In order to not miss out on the next big thing, they just might accept the new terms.
It’s just another sign of the overheated times.