Overvaluations remain a persistent issue in venture capital, impacting both founders and investors. The inflated valuations of 2021 continue to weigh on startups, particularly in the current market downturn. Now, with AI startups commanding aggressive multiples, history seems poised to repeat itself.
While turning down funding is difficult, restraint, when possible, is often the better choice. Otherwise, founders risk setting their companies up for failure. Here’s why.
Causes of overvaluation
Certain factors drive inflated valuations. Second-time founders, for example, command higher multiples due to their experience, network and lower perceived risk. But market forces also play a role — when investor demand exceeds startup supply, prices rise.
Israel provides a strong case study. While local VC dry powder hit record lows, foreign investors doubled early-stage cyber investments year over year. In 2024, Israel cybersecurity startups raised $4 billion, up from $1.89 billion in 2023.
Exit opportunities are also rising, with $4.5 billion from cyber M&As last year, and 20 active cyber unicorns valued at $61 billion total.
With investor appetite high, the valuation premium holds. In my perspective, Israeli cybersecurity startups now command valuations up to 40% higher than their U.S. counterparts, fueled by a self-reinforcing ecosystem.
The problem
Overvaluation causes problems in subsequent rounds. Founders face greater dilution, struggle to raise follow-on funding, and often resort to extension rounds instead of securing solid Series A or B funding. Excessive early capital also leads to high burn rates, making startups less capital-efficient and harder to scale sustainably.
Consider a standard seed round — $3 million raised at a $12 million post-money valuation. If the company grows to $800,000 or $900,000 ARR, it can raise a Series A round at $25 million. But if the same seed round was raised at $25 million post-money, the company may hit a valuation ceiling by its next round.
This is a common trap for some startups in Israel. Many raise their seed rounds locally at inflated valuations but seek U.S. funding for Series A. As a result, they lose the Israeli market premium, often forcing them into a flat round at their previous valuation.
The extension round dilemma
Rather than accept a flat or down round, many founders opt for extension rounds.
These allow them to raise additional capital without explicitly resetting their valuation. While this can buy time and works for some, for others it often delays the inevitable. If traction doesn’t improve significantly, future fundraising becomes even more difficult.
What can founders do?
First, raise only what you need. Taking too much early capital limits flexibility and creates a false illusion that can lead to overspending.
Then, prioritize capital efficiency. If overvaluation has already occurred, adjust your expenses and extend your runway strategically. And last but not least, be willing to reset your valuation. A flat or down round, while painful, is often the best option.
Demystifying down rounds — and why they matter
Founders avoid down rounds due to dilution, while investors hesitate because it forces them to make tough decisions. Yet, in many cases, a valuation reset is the healthiest path forward. Smart investors understand that keeping founders motivated is more important than protecting early backers. To ensure alignment, some investors offer additional options to incentivize key team members post-down round.
Flat and down rounds are more common than people think — just rarely publicized. What matters is long-term viability. If the team is strong, the product solid and the traction real, investors will come. A well-executed reset can position a company for sustainable growth, avoiding the pitfalls of excessive valuation and overfunding.
Sergey Gribov is a general partner at Flint Capital, a VC firm investing in early-stage startups, with a strong focus on Israeli and U.S. companies in cybersecurity, fintech and digital health. With more than 20 years of experience as an entrepreneur and investor, he serves on the boards of Socure, Cyolo, Cynomi, and others, bringing deep expertise in scaling startups, expanding into global markets, and navigating venture funding challenges.
Illustration: Dom Guzman
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