Venture pricing paradox
I was talking to a colleague today about the habit of Australian venture capitalists in taking participating preferred stock as opposed to non-participating preferred stock or capped preferred stock.
I pointed out that 99.9% of all deals ever invested in by Australian VCs have been out of the money, so very few founders have been affected by the difference.
I also noted that because of the low success rate of VC in Australia that this tough ‘pricing’ mechanism seems justified.
But thinking further, any deal that is unexpectedly successful is likely to attract later stage funding from foreign investors and the very same participating liquidation prefs, carried through to later and bigger rounds, might actually work against the local investors.
Especially since their share of later rounds is usually somewhat limited by percentage, not necessarily due to their investment capacity, but also due to the perception by US VCs that they are ‘passengers’.
Without doing a spreadsheet calculation my gut says a capped liquidation preference might be a better bet, and at least it is a plan that foreshadows success.
So I say to Australian VCs, the handful that are left, stick to capped liquidation prefs and adjust the pre-money valuations down accordingly.
Now I am laughing; imagine trying to convince the cargo cult rump of the merits of this logic?
offshore westerly 