A recent Carta research showed that the number of down rounds among startups raising money has increased significantly. The percentage of all funding rounds that are down rounds in Q1 2023 is 3.5 times higher than in Q1 2022, going from 5.2% to 18.7%.
A down round refers to a private company offering additional shares for sale at a lower price than had been sold for in the previous financing round. Down rounds are often viewed as a company’s last resort, its only chance of staying in business. Some in 2023 are more open to the prospect, given the economic scenario. Still, the implications of a down round can be significant: lower ownership percentages, loss of market confidence, and negative impacts on company morale are just some of the possible consequences.
The current increase in the number of down rounds can be attributed to several factors. First, the pandemic has impacted all businesses, and some startups have not been able to survive the economic downturn. Second, the high valuations that were common in recent years have come under scrutiny as the market looks to see if the companies can meet their promises. Third, the emergence of competition is causing investors to hedge their bets and demand lower valuations on subsequent funding rounds.
Unfortunately, the uncertainty about when this trend might end is troubling for startups. Companies may not know when the market will stabilize, and this creates uncertainty about how to plan for the future. The situation is also troubling for investors, who may be hesitant to invest in companies that may need another down round in the future.
The increase in down rounds among startups is a concerning trend, and can be attributed to several factors outside the control of startups. While the market may stabilize soon, startups should consider taking action now to address the potential consequences of a down round, with the best course of action depending on the specific circumstances of each company.