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ACADEMY: What is a down-round?

Posted by Tanya Prive on Jun 22, 2016 4:23:00 PM

 

A “down-round” sounds like a scary thing, and it kind of is. A “down-round” occurs when a company needs to raise money at a valuation lower than the post-money valuation of its previous round. So for example, if a company raises $10 million at a $40 million valuation in 2015, and then it needs to raise $5 million at a $25 million valuation in 2016 because they have been burning through cash and are running out of money, that is a down round. And that means that without full ratchet anti-dilution provisions, which most people don’t have, the value of the previous investors’ stake is now underwater. Right now you are seeing write downs on unicorn valuations and flat-rounds happening for large well-known companies. These things are both harbingers of the dreaded “down-round”. It is a clear indicator that the market has softened and people are less optimistic about the future expected exit potential of their investments. It’s also a sign that the cost of startup capital is increasing, as people demand a higher return for the risk on their equity.

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Topics: Venture Investing Academy