A down round happens when a startup raises new funding at a valuation lower than its previous funding round.
This means that the company’s value has decreased since the last time it raised money, and investors are now willing to invest at a lower price per share.
So, what should you do in case of a down round?
How do you prepare for this?
Let’s unwrap.
First of all, we need to understand that down rounds happen when a startup is unable to meet its projected growth or revenue targets or if market conditions have changed.
Here are a few common reasons for down round:
- A startup doesn’t achieve the growth, customer acquisition, or revenue targets promised in earlier rounds.
- The overall market or economy is struggling, and investors are lowering their valuations across the board.
- The startup may face more competition than expected, reducing its market share and perceived potential.
- New investors might perceive higher risk in the business, leading them to offer a lower valuation.
Down round has a negative impact on your fundraising journey as well as on your startup in general.
Founders and existing shareholders may experience greater equity dilution because more shares will need to be issued to raise the same amount of money. Their ownership percentage in the company decreases.
A down round can also signal to the market, other investors, and employees that the company is not performing as expected.
This can create a negative image and potentially affect future fundraising rounds or partnerships.
Employees who have stock options or equity in the company may feel discouraged if their shares are now worth less than they were in previous funding rounds.
How Do You Manage a Down Round?
While a down round can be challenging, it doesn’t necessarily mean the end for your startup.
Many successful companies have gone through down rounds and recovered.
To manage it effectively, you should be open with your team and investors about why the down round is happening and how you plan to move forward.
Try to negotiate favorable terms beyond valuation, such as control over decisions or performance-based incentives.
Use the new funds to focus on areas that can drive growth and improve the company’s valuation for future rounds.
Of course, a down round can result in more equity dilution and a negative perception.
However, with transparent communication and a focus on improving the business, it’s possible to navigate a down round and position the company for future success.