Quora Answer: What Happens if a Startup Fails to Reach Valuation?

The following is my answer to a Quora question: “What happens if a startup fails to reach the valuation that its investors value it at?” 

That depends on when this occurred, and the context of the fundraising.  The value of a company is dependent on its assets and what people are willing to pay for an equity stake.  Often, this is dictated by market sentiment more than the books of the company.  There will be times when a startup does not achieve its targets during a round of fundraising.  This can be due to events in the market, political and currency risk, management issues, or simply a bad pitch. 

If it is due to events in the market, the market is cyclical, and if it is an option, the startup simply waits out the cycle, and go back again.  It is the same with political risk and currency exposure.  The former is mitigated, and the latter is hedged against.  If it is management issues, then investors and shareholders will likely pressure the management to adjust the lineup.  This could include hiring an experienced chief executive, for example, or bringing in expertise to the board.  If it is a bad pitch, then amend it and go back into the fray. 

If, after all this, that next round of fundraising fails to achieve its targets, then the conversation becomes serious.  Investors may seek to fold the startup into another, consider a total buyout and put their own team in place, or simply exit.  If they exit, there are likely agreements in place where the various tiers of investors take their share first.  Whoever is left bears the brunt of that loss of equity value.