Fundraising hurdles and M&A slowdown with Becki DeGraw | Wilson Sonsini Startup Legal Basics

Episode Summary

Executive Summary: The episode examines the tougher 2024 startup environment: fundraising is harder, later-stage companies face down or flat rounds, M&A is chilled by regulatory scrutiny, and privacy/security compliance has become a major startup burden. Becky DeGras and Jason Calacanis stress that founders must adapt with better counsel, tighter data practices, and realistic expectations about exit and financing.

Main Topics: Harder fundraising environment (Priority: 5/5): Companies are finding it more difficult to raise capital than in prior years. Even good startups can still get funded, but later-stage companies face more scrutiny, more hoops, and less appetite for growth at any cost. The flat-round and down-round paradox (Priority: 5/5): Founders were told to reduce burn, extend runway, and conserve cash, but those actions often led to weaker growth metrics. When they return to market, they may have break-even finances but lack the high-growth profile investors want. Penny warrants and creative financing (Priority: 4/5): Investors and startups are using structured terms like penny warrants to bridge valuation gaps. These allow companies to present a 'flat' round while giving investors economics that effectively reduce the valuation. M&A market chill and regulatory scrutiny (Priority: 5/5): M&A is described as unusually cautious, with more deals stalling late in the process or being renegotiated after heavy diligence and legal spend. Regulatory uncertainty is suppressing buyer appetite. Privacy, compliance, and multi-jurisdiction burdens (Priority: 5/5): Startups face increasingly complex privacy and regulatory obligations across the US, California, EU, UK, and other regimes. These requirements drive up legal costs and can deter data collection or storage entirely. Security, discovery, and internal communication risk (Priority: 4/5): The discussion warns founders and executives that emails, texts, recordings, and board-call transcripts can become liabilities in litigation or discovery. Best practice is to communicate carefully and avoid unnecessary recording.

Key Arguments: Tighter funding conditions mean later-stage startups must do more with less, but that often suppresses the growth investors want to see. Companies that prioritized burn reduction and break-even status may now struggle to raise because they no longer show the high-growth metrics associated with venture returns. Down rounds are increasing and so are 'flat' rounds that include warrant coverage, making the economics effectively worse than the headline valuation suggests. M&A is being slowed by regulatory risk, which increases legal costs, extends timelines, and causes deals to collapse even near closing. International antitrust and privacy regimes can subject a single transaction or product to multiple layers of review and compliance, raising transaction costs materially. Startups should minimize data retention and implement strong guardrails because storing more data increases legal and security liability faster than it reduces operating costs. Board meetings and sensitive internal conversations should generally not be recorded because discoverable transcripts can create litigation risk. Founders need experienced counsel early because legal and regulatory issues now affect fundraising, M&A, privacy, and crisis response more than in prior cycles.

Data Points: Valuation example: $100 million - Used as a simple example of a prior company valuation in the penny-warrant explanation. Raised capital example: $10 million - Used in the illustrative cap-table math for a company’s earlier financing. Top-off financing example: $5 million - Example of additional capital needed to get the company back on track in a follow-on round. Warrant price example: $0.01 per share - A penny warrant lets an investor buy stock for a penny per share as part of the financing structure. Dilution example: 5 million shares / 5% of the company - Illustrated how the warrant could allow purchase of another 5% of the company for $50,000. Combined economic example: $5,050,000 - Total investor outlay in the example when combining the flat-round investment and warrant exercise economics. Runway example: 24 to 48 months - Described as the runway some companies may have after cutting costs and conserving cash. Growth threshold: 10% year-over-year - Characterized as insufficient for a high-growth venture-backed company in the current market. High-growth benchmark: 50% to 300% year-over-year - Described as the kind of growth investors typically expect from private companies depending on stage. Legal spend example: $500,000 to $1 million - Estimated legal fees each side may incur when an M&A deal gets far along and then stalls or renegotiates. M&A timing example: 6 to 18 months - Potential duration for obtaining regulatory clearance in some transactions. Data retention example: 1 year to 2 years - Example of revised corporate retention policies mentioned as a response to litigation and compliance risk. Regulatory jurisdictions mentioned: 4 - California, the United States, the EU, and the UK were cited as overlapping privacy regimes. Market cap threshold proposal: $250 billion / $500 billion / $1 trillion - Jason’s suggested tiered M&A rules separating smaller companies from large dominant platforms.

Pivotal Quotes: "It’s not all up and to the right, unfortunately." — Becky DeGras: Summarizing the tougher startup and fundraising environment in 2024. "We’re seeing fewer and fewer up rounds." — Becky DeGras: Describing current financing outcomes as down rounds and flat rounds become more common. "You need somebody in-house to hire with the expertise that really understands and is able to help with setting everything up." — Becky DeGras: Explaining the staffing and legal cost burden of compliance and privacy regulation.

Implications: Founders should expect tougher fundraising, more structured financings, slower exits, and heavier compliance obligations. The best defenses are disciplined burn, strong counsel, minimal data retention, careful communications, and realistic M&A planning.