Mark-to-Market Rounds - What Will Your Startup's Strategy Be?

Ten years ago, startups pulled capital from the capital markets. A startup raised money, executed for 12-24 months then sought more capital on Sand Hill, flaunting milestones to justify a higher valuation.

Today, a global investor base pre-emptively shoehorns dollars into the most attractive startups, saturating the balance sheet with cash every six to nine months. I call these mark-to-market rounds.

Mark-to-market rounds press private markets closer to public markets in three ways.

First, these financings establish a company’s value on a near-quarterly basis. Public companies are marked-to-market daily, but “more precisely” after quarterly earnings.

Second, mark-to-market rounds offer secondary. Investors furnish founders and early employees with cash in exchange for common shares. Secondaries are common for publicly traded companies, too; it’s customary to sell secondary six months after a startup’s IPO.

Third, investors price these infusions on multiples just the way a sell-side equity analyst would. Many investors extend the analogy by staffing a research arm. Their pdf output analyses the space, lauds the business’s prospects within it, and dissects relevant rivals. (link to 100x ARR)

The mark-to-market phenomenon fundamentally alters the board’s discussion of an investment proposal. Rather than debating if the offer fuels the financial plan fully, boards consider loftier questions.

Will the quantum of capital and the headline valuation anoint the company the winner in its category?

How might the brand of the leading investor bolster the startup’s market presence?

What improvement in recruiting close rates can the company expect?

Might the increase in 409a valuations offset that gain?

Can the secondary improve employee retention?

Is the business comfortable with a larger preference stack?

Mark-to-market rounds aren’t going away. In fact, we should expect more of them as the private market’s behavior asymptotes to the public market’s.

Some of our portfolio companies raise mark-to-markets annually or bi-annually as a matter of course to demonstrate strength, provide liquidity, forestall an IPO. Others leverage mark-to-markets as a defense against M&A. Still others forgo them altogether, not wanting to burden the balance sheet with excess assets. And last, some decide to negotiate the valuations lower, preferring a consistent and more modest price increase, and the confidence of knowing next year the business will be worth more, irrespective of a correction.

As passive venture investing continues to grow and venture dollars swell and swirl, each startup will need to define their own strategy of whether to entertain mark-to-market rounds and at which terms.

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