Down Rounds Everywhere

“It’s an absolute bloodbath.”

Cameron Lester, Jefferies.

Down rounds in unicorn startups are everywhere in today’s funding crunch. Should we be worried?

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From a report out this morning in Bloomberg:

Toward the end of 2022, down rounds hit near five-year highs, according to research firm Prequin. And early data for the first quarter shows roughly 7.5% of all venture funding rounds in US were down rounds, according to PitchBook — a number it expects will climb. High-profile companies like financial giant Stripe Inc., Swedish payments startup Klarna Bank AB and security firm Snyk have already taken valuation cuts, and others like are said to be in talks to do the same. 

Down rounds feel rotten.

You’re no longer uppy and to the righty. Founders and employees could lose millions in paper gains. Investors’ performance takes a hit.

Sounds scary right? Well, it’s about to get worse:

“We expect down rounds, especially toward the second half of this year, to really pick up,” said PitchBook analyst Kyle Stanford.

Many advise companies that a down round is better than no round, and they should take the money at whatever terms available.

I disagree.

Big, late-stage startups could reach profitability. Then, they have no need to raise. If they choose to do so, it will be on their own terms.

But that’s hard!

Sure it is. No one enjoys layoffs.

Okay, maybe Mark Zuckerberg.

But if a billion dollar business cannot stop losing money, is it a viable business? How could a company supposedly be worth so much but completely unable to turn a profit, even of $1?

Reaching profitability is a great exercise for any business. If your gross margins are negative, you’ll find out in a hurry.

Finding out your business isn’t viable is hard. But at least you know.

Then, you have a chance to retool it before it’s too late.

You also have a chance to grow into an enduring, highly profitable public company. That’s our goal — right?

Perhaps not.

For too many startups during the bull market, fundraising became an end in itself. They forgot about building a viable business because they didn’t need to!

After all, there was always another round coming.

Those days are over. And good riddance.

But we investors can’t blame founders. We enabled them, every step of the way.

The past is the past. What matters today is to build and fund viable businesses that become major, enduring companies.

Anything else is noise.

How do you view down rounds? Leave a comment and let us know!

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