Startup Founders Say Venture-Capital Investors Are Driving Harder Deals - WSJ

Startup founders say venture-capital investors are offering tougher terms as companies attempt to raise money amid economic uncertainty and a broad selloff in tech stocks.

Valuations are sharply lower than they would have been last year, according to entrepreneurs who gathered at the Collision tech conference that drew 35,000 attendees in Toronto last week.

“We’re raising a Series A right now,” said Dejan Mirkovic, chief executive and co-founder of Goose Insurance Services Inc., a Vancouver-based startup with an app that people use to find, get quotes for and buy insurance. In venture capital, “A” series funding follows initial angel or seed investments and can be followed by additional rounds of venture funding.

“The issue is that the market has a lot of capital to deploy, but everyone’s a little gun-shy,” Mr. Mirkovic said last week in Toronto. “A 30% haircut right now is what we’re seeing,” he said, referring to the decline in startup valuations from their peak.

Mr. Mirkovic said one potential investor asked him for so-called participating preferred shares, a deal structure that became difficult for investors to sustain during the founder-friendly heyday of the venture boom. “We said no,” Mr. Mirkovic said.

In the event that a company is sold, an investor with participating preferred shares would be guaranteed to recoup the original investment, plus a percentage of the remaining proceeds, according to PitchBook senior analyst Kyle Stanford. “It is seen as double-dipping. It can be pretty common, especially in down markets,” Mr. Stanford said at Collision.


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