In recent years, an interesting situation has unfolded and is unfolding in many of our later stage startups that raised large sums of money ( >100m usd and up) at high valuations back in 2020 to 2022 period.
The tough situation to navigate is when the pref stack value is similar or even lower than current market value of company. Eg startup in 2022 raised another 100m at unicorn 1b valuation. At that time, everyone just dilutes about 10%. Total pref capital is $350m. But with rerating now, the startup is at best worth $300m based on comparables.
This means the entire ord share capital is essentially worth a lot less or zero now. Thats obvious. Whats less obvious is that the pref shareholders may realize their upside is gone/greatly diminished and switch mindset to capital preservation and worry about reporting large writedowns to their LPs. It also means it’s not a winner in their portfolio so they will understandably be unhappy. Also diff class of pref may also have diff terms and feel quite differently. Very early pref can be in same situation as ord.
As one can appreciate, there is a sizable number of factors, relationships for a good mgmt to consider in order to navigate well out of this. Here’s what I think.
- Once mgmt sense this kind of situation unfolding in the macro environment, cut cost to become profitable. Conserve cash. This is the single most important thing to do. Ning & I pushed for this as early as 2022. You have to get your board to see this improves their outcome.
- Once real cash flow breakeven, resume growth in revenues. This will show that business is one that survives in low or high IR , diverse macro environment.
- Keep your investors aligned to this plan by explaining it at least this ensures their capital preservation. For mgmt and ordinary, it’s trying to bring back the value of the ord shares.
- If you can, take milestone esop for mgmt instead of cash to put your money where your mouth is.
- After 2-3 years, let’s say you managed to pull off the cash burn reduction and have runway whether profitable or not. Now have time to solution and negotiate a win win outcome.
Trade sale at right terms of course is best and straight forward. But at $300-400m and up, it’s hard to find buyers in any except a bullish climate.
IPO becomes possible. IPO may require your pref shareholders to still take some haircut but at least their public shares post ipo can offer possibility of profit down the road. For mgmt, it’s a great way to reset everyone. But it must be negotiated as I am sure most pref shareholders terms have anti dilution, vetoes etc. So it’s a need everyone ok with type of move, can’t force.
If scale is smaller, then perhaps finding a new shareholder or mgmt buyout to replace less patient pref shareholders is another solution. Imagine in 2028, your company is profitable but top line and growth still a bit smallish. You can try to find different type of backers to replace pref. Even pay to play type rounds where some existing or mgmt investing. Key is your hand holding of pref shareholders thru this process.
Under the IPO lens, the latest TIA article on Shopback actually showcases many of these actions in play between 2023-2026. Revenue didn’t grow significantly for 2 years but good cost cutting. Latest 2025 financials showing revaluation of pref stack down to $400+m. To me this possibly indicates that valuation or outcome of these shares has fallen as of 2025 and so need to accounting write down value of liabilities.
Interestingly it shows up as an accounting profit but it’s not really a positive or negative thing. And company says resumed growth in 2026 with 30% rev growth which is very credible. Kudos to the team there.
Now if not already, mgmt should be envisioning and negotiating with investors and board on how to recreate value.
A decent case will be revenue growth 30% per annum next 2 years, hit 200m+ revenue with a 20m+ net profit after tax. Then I think a asx or sgx is very possible. Exact valuation that moment is anyone’s guess but with those numbers, I think ord shares will have value again, mgmt definitely incentivized and pref shareholders will likely ok (not happy but ok) with outcome too.
What is described above is likely going on with many startups that have raised capital that is beyond that current market value. We know of at least 3-4 more like this and if anyone just googles for those that raise more than 100m, there are many more. I hope many of these founders are executing as successfully or better than what Shopback is doing.
To summarize, it is cut costs, turn profitable, align your board on new reality and go for win win solution. Most important lever is to make your business attractive for public market investors in all climates. Think SE if really big, or Ifast if smaller or LHN if even smaller scale.
Hope this sharing is useful to founders and investors alike. It does also highlight the complexity of having a big pref stack. So perhaps always controlling your board and being the biggest shareholder is the best model to navigate all types of markets. And if really need institutional capital, use as little as possible and negotiate terms contemplating down cycles.
A bit of 废话here, but I think in the exuberance of easy capital, sometimes this basic truth gets lost!
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