High Valuation & Capital Allocation For Dummies

Early stage valuations are often too high until you reach either a market or a strategic value. On top of that, the more liquid & inflated a market is and the more the valuations rise up, impacted by the expected returns of an euphoric market.

The consequence is also that companies are raising more money to burn more, tracing a route to high growth / scalability or fatality / brutality.

Raising money means raising the bar. This bar is where people expect you to be within few months/years. Below that line, nobody is waiting for you… Get used to that. Down rounds hurt. No one likes to cope with the hard truth nor gets her hands dirty to save Private Ryan. Only opportunistic and sophisticated investors are ready to jump in and make a deal that looks bad and does not shine.

High valuation equals high expectations. People will assume that you have failed or that you’re failing if the expectations mirrored through the valuation were (far) higher than the reality. It’s even more true when a lot of money has been invested. Capital Allocation is like time: you don’t buy back time and you don’t buy back the money you’ve burnt. You must make sure your allocation is wise and that operations are moving towards the right direction. Otherwise you’re in a bad position.

Captain Train is a successful example in terms of valuation, amount raised and capital allocation.

Extension and bridge rounds are an option to temporarily allow you to correct the trajectory, but not always and not for long. Your next round depends on the previous one. The higher the valuation, the higher the round, the higher the expectations, the higher the pressure.

Just think about that.