GOAT acquisition of Grailed shows impact of VC tightening

Last week, sneaker and apparel resale marketplace GOAT acquired online fashion marketplace Grailed. Grailed raised a new VC round last year for $60M and in doing so, helped itself now because it has a strategic investor to take it off the table.

"Undisclosed acquisition" often means it was done for strategic reasons, and not any kind of growth story.

But if you are a founder who raised at higher valuations, then you are likely also thinking about things like: "Should I be looking for the exits, and how?"

Having been in tough VC valuation and cash flow situations in the past, here's how I might think about it.

The situation starts with a question like this:

- Are you making money or not? If you are less than -20% net operating margin and growing less than 30% y/y than you are already likely in a tough situation.

If the answer is no, and you are struggling with profitability, your questions move quickly to these:

- How long can I extend my runway if I make minor adjustments to the business, in the neighborhood of 20% to get close to break even?

If the answer to this is also no, then you options are more dire, they move to questions like:

- Do I do a major restructuring of 30-50% to "reset the business" back to a more sustainable pace?

or are there other options? In the absence of a new VC investors who would invest at the same valuation, the conversation moves quickly to strategic acquisitions:

- Which larger company in our industry is in a situation where what we do best would materially change the trajectory of their business?

- Is there one of our top investors or customers that would be materially harmed if we failed?

In this case, this last question proved successful for Grailed. GOAT and the CEO of Gucci were lead investors in Grailed. As a result, GOAT has sunk capital in the business that it would value higher than any new incoming capital -- which would likely be worried that economy could be troubled for some time.