I was sitting down with an experienced entrepreneur a few days ago who was telling me about a guy he was advising who was having no luck raising a Series A round. Apparently, when he got seed money from friends, family, and fools, he was a great salesman and got a pretty high valuation. Now, as he is dealing with sophisticated investors, the valuation he is pushing is 2x - 3x what his company should really be worth, and nobody will give him money. Further, even if he does raise a Series A of 1.5M or whatever he needs, he's still going to need another round of 5M or so to do what he is trying to do, and eventually he'll have to take a down-round, which will obviously not sit well with his current investors.
My response was: "Wow, I hadn't really thought about it that way. I guess I had just assumed that it was advantageous to the entrepreneur to give away as little equity as possible to get as much seed as possible from the get-go." My friend went on to explain that, no, having too high of a valuation is one of the worst mistakes young entrepreneurs can make, and that he has seen companies literally torn apart because early investors refused to take a down-round and would sue to prevent it. Obviously, when investors are suing their entrepreneurs, no sophisticated investor will touch the company.
Has anyone seen or experienced this issue?