The Damaging Psychology of Down Rounds

Both Sides of the Table

“Whenever I hear advice about pricing a round too high for the next round, I can’t help but think: well, if the choice (ceteris paribus) is between. a) doing what is effectively a down round preemptively when I don’t have to, by underpricing my current round in this market vs. b) accepting the market price along with some risk of taking a down round in the future, if I don’t hit my milestones, why would I ever choose b)?”

Founders – Use Your Down Round To Clean Up Your Cap Table

Feld Thoughts

This is a little tricky in early rounds and with modest up-round financings, as you’ll often have a liquidation preference that is high relative to your overall valuation. Then, if you end up doing a down round, it suddenly matters a lot. Don’t worry about this too much, until you do a down round. Then use the down round to clean up your preference overhang. Venture Capital cap table down round Financing VC


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Cash is King: 8 tips for Optimizing your Startup Financing Strategy

For Entrepreneurs

Getting Funded avoid down round Startup fundraising startup valuationIntroduction This post aims to help startup CEOs optimize their funding strategy by examining how investors value startups, and explaining how to avoid the common cash management pitfalls. Note: The concepts in this post will likely be obvious to experienced CEOs and entrepreneurs. Despite that, our experience indicates that entrepreneurs frequently make costly, avoidable mistakes [.].

Capital Market Climate Change

Ben's Blog

Had you not had the experience of raising your last round so easily, you might have seen this round coming. As if the price could never go down. When you go to fundraise, you will need to consider the possibility of a valuation lower than the valuation of your last round, i.e., the dreaded down round. Down rounds are bad and hit founders disproportionately hard, but they are not as bad as bankruptcy. Yes, we did a down round.

CES Quote of the Day - "We Will Be Very Supportive Of Your Down Rounds This Year".

Seeing Both Sides

Although attendence was down, it is still an insanely large audience of 130,000 attendees and 2,700 companies. CEA head Gary Shapiro reported in his keynote that industy sales were up over 5% and that 2009 will be flat or slightly down. But one look at all the frozen cranes up and down the strip is all you need to know that Sin City is in for a tough run in 2009 and 2010. But Intel Capital will be happy to invest in their down rounds

Quote Of The Day


Why I Canceled My CO2stats Account → Quote Of The Day Posted on January 9, 2009 by fnazeeri We intend to continue forward and be very supportive of your down rounds this year.&# @altgate Startups, Venture Capital & Everything In Between Skip to content Home Furqan Nazeeri ( ← Be Glad You Are An Entrepreneur!

5 Equity Crowdfunding Reflections Before You Sign Up

Startup Professionals Musings

I would summarize the qualms and feedback from professional investors as the following: Crowdfunding platform costs trickle down to angel groups. Later funding rounds can’t deal with a thousand shareholders.

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What Most People Don’t Understand About How Startup Companies are Valued

Both Sides of the Table

And two big changes have happened that are widely known – in the past quarter the value of some very high profile companies such as LinkedIn and Twitter have fallen substantially plus Fidelity (usually a public market investor) has written down the value of many of it’s later-stage private-company investments and made the downward valuations known. ” “Mark has a vested interest in talking down valuations of startups.” Why Inside Rounds are Difficult?

Silicon Valley Venture Capital Survey Finds That, Yes, Valuations Are Up


According to Barry Kramer, a partner in the firm and a co-author of the survey, during the third quarter, "up rounds exceeded down rounds 52% to 30% with 18% flat. This was similar to the second quarter of 2010, when up rounds exceeded down rounds 55% to 27%, with 18% flat, and the fifth consecutive quarter in which up rounds exceeded down rounds.".

Fundraising advice: Don’t over optimise on terms

The Equity Kicker

They will most probably go on to raise multiple rounds of venture capital after all. And don’t forget the prime directive of fundraising strategy: set things up so that you never do a down round. The badness of a down round is difficult to overstate; in fact, the threat of that is the best reason not to take a super high price when you’re offered one. If you raise at such a price, everything has to go perfectly in order for your next round to be an up one.

How to Talk About Valuation When a VC Asks

Both Sides of the Table

What was the post money on your last round (and how much capital have you raised)? It’s not uncommon for a VC to ask you how much capital you’ve raised and what the post-money valuation was on your last round. If you’re talking with a typical Seed/A/B round firm they often have ownership targets in the company in which they invest. A second thing a VC may be trying to determine is whether your last-round valuation was significantly over-priced.

Bad Notes on Venture Capital

Both Sides of the Table

We raised a seed round. You’ll find out the minimum when the next round is raised. At an accelerator … Me: Raising convertible notes as a seed round is one of the biggest disservices our industry has done to entrepreneurs since 2001-2003 when there were “full ratchets” and “multiple liquidation preferences” – the most hostile terms anybody found in term sheets 10 years ago. How will you price the next round? Your A round?

Take advantage of the good times to build stakeholder loyalty.


For investors, a subsequent down round at a lower valuation than the last, or an exit opportunity at a loss are all opportunities for the affected stakeholder to show a side that can sometimes shock an entrepreneur or CEO. Loyalty is a hard-earned commodity. There are several times when stakeholder loyalty is tested to the limit. For employees, a late or missed payroll is the ultimate test of corporate loyalty, divorced even from an employee’s ability to make do without a paycheck.

Seed investment negotiation mistakes

NZ Entrepreneur

The following highlights some ways founders sometimes trip up in negotiating an early investment round, resulting in a deal they are unhappy with, a tainted relationship with the investor, or losing the deal altogether. For some founders, negotiating a seed investment can be difficult.

Sensitivity Analysis key in startup financial projections

NZ Entrepreneur

If a startup expects $1M in sales revenue but only gets $100k and they haven’t got a backup plan, they may face a down round or in the worst case liquidity concerns. No one can predict the future and it’s especially true in the startup world.

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Reduce five risks: Increase your valuation


Why five risks? In the creation of a young company, there are five principal risks to be addressed by the entrepreneur. Professional investors will probe these five risk areas and make the decision to invest based upon comfort with each.

Current Startup Market Emotional Biases

Feld Thoughts

Fred Wilson’s daily post referred to the article in Don’t Kick The Can Down The Road. Also, they have a strong belief that any sign of weakness (such as a down round) will have a catastrophic impact on their culture, hiring process, and ability to retain employees. Their own ego is also a factor – will a down round signal weakness? Anything that hints of a down round brings questions about the success metrics that have already been “booked.”

Three Startup Financing Myths You Should Avoid


I always caution entrepreneurs not to take too high a valuation in any round because it sets very high expectations for the next round. A down round, which can damage a company and make it difficult to raise money in the future.

Small Investors


The treatment of the friends, family and angels (FFA) as the startup matures and raises larger rounds of financing over time is interesting. If FFAs only invest at the beginning and do not make any follow on investments as the company raises more $$ then the only real way FFAs make money when the company is ultimately sold is if the company keeps raising future rounds at higher and higher valuations (and IPO exit may provide upside if the stock price increases over time after the IPO).

What Do Industry Insiders Think Will Happen in VC in 2016?

Both Sides of the Table

So why the slow down all of a sudden? 61% of VCs said valuations were “marginally down” in Q4 of 2015 but 91% expect price decreases in the next two quarters. If median valuations are down massively, later-stage investors are staring at their trading terminals and fund-raisings are taking longer – of course companies must cut burn rates. Most flat rounds. More down rounds. More structured rounds.

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Think ahead when raising your early investments


If so, the VC will contemplate a “down round” – that is: offering an investment where previous investors find their investments instantly worth less than their original value, even if the investments were made at high risk and years earlier. No one wants to face this, but the need for money and the possible overpricing of the first rounds may have created an unsustainable valuation. How did you structure your first round? .

Changes in the Venture Capital Funding Environment

Both Sides of the Table

In other words, it isn’t that VCs suddenly got smart, it’s that the costs of starting a company went down dramatically. I Leaderless Rounds. With a massive increase in companies created and a huge number of sources one trend that we witnessed from 2012–2015 was the rise of the undisciplined round. Non VC Growth Rounds. The market eventually slowed down. Some examples There was an A-prime round of a high-profile deal coming together.

Spreadsheets in legal documents

The Equity Kicker

I’ve been here before too, when implementing anti-dilution clauses after down-rounds. I have spent a considerable part of today translating the equalisation clauses in our Limited Partnership Agreement into formulas in a spreadsheet.

A Recently Exited Founder on Surviving the Contradictory Role of Startup CEO

View from Seed

I called the recruiter running the search and told him I was going to step down and hire a CEO. Other CEOs are the only people you can sit down and talk with about the hardest parts of your job. Sometimes the only path forward is to fill a gap with a down round of funding, a B-player, or some other non-ideal option. This is a guest post from Rob May , a co-founder and CEO of Backupify , which raised $19.5M and sold to Datto in late 2014.

Venture Capital Q&A Session

Both Sides of the Table

The A round was done in February 2000 (end of the bull market) and my B round was done in April 2001 (bear market). As a result I had to do a down round. Down rounds are psychologically really difficult on companies and can make it harder to do later rounds.

Professional Investors Qualms About Crowdfunding

Startup Professionals Musings

I would summarize the views and qualms from professional investors as the following: Crowdfunding platform costs could trickle down to angel groups. Unreasonably high early valuations hurt the entrepreneurs, as well as professional investors, later when a second round becomes a down round or can’t be negotiated. Later funding rounds can’t deal with a thousand shareholders. Even if the additional rounds are also crowdfunded, the same considerations apply.

Why Startups Should Raise Money at the Top End of Normal

Both Sides of the Table

If you invested in the first angel round of a startup company it is usually very hard to sell your stock – usually for many years if ever at all. Ah, but you say that for a normal-sized angel check or A round check one shouldn’t worry about the ultimate exit because he or she is getting in really early and at a cheap enough price so who cares whether one pays $5 million pre-money or $15 million pre-money – you just have to make sure you back really big companies.

What is actually happening during a VC slowdown?

This is going to be BIG.

Fear, not surprisingly, weighs markets down. They might have to get another round in, and that round will most certainly be a down round. The public markets have been stumbling around lately, trying to figure out what China and oil prices mean for the rest of the world economy. That uncertainty creates fear--and in a US Presidential Election where fear is the debate topic de jour, we've got plenty of that to go around.

Keep Term Sheets Simple for Quicker Cash to Spend

Startup Professionals Musings

Venture capitalists and later round investors like the preferred convertible shares. This clause attempts to protect the conversion price of stock of Angel investors, prior to additional financing, from being reduced to a price equal to the price per share paid in a later “downround. You can end up becoming very frustrated with the investors, or cause the venture to fail if you run out of seed capital before the angel round can be completed.

On the Square and Match IPOs and hopes for a correction

The Equity Kicker

So the share price has been trending down for some time before popping after the IPO. I say that because investors in the $6bn round in Square have still made money on the deal. They had a ‘ratchet’ which repriced their investment in the event of a down round to give them a 20% return. and Square both enjoyed strong first days after their IPOs yesterday. Match closed up 23% at a valuation of $3.5bn and Square was up 45% at a valuation of $4.2bn.

Why Raising Too Much Money Can Harm Your Startup

Both Sides of the Table

I understand this instinct for more capital and I have two very different personal experiences: In my first company we raised an A-round of $16.5 There is a general guideline of how much investors want to own in order to invest in your company and the norm is 15–30% with the most common range 20–25% per early stage round. And if you raise the “5 on 20” and don’t grow into your next-round valuation you’re stuck because venture investors HATE doing down rounds.

How NZ entrepreneurs can up their capital raising game

NZ Entrepreneur

I personally funded my first ventures, then led the two rounds that have seen Ambit take in $2.2m And importantly, each round needs to be an increase on the last, so investors feel like their investment is winning and share the news or hopefully re-invest. The situation I see time and again is an over-valuation on a markedly smaller-than-anticipated business, revenue numbers not achieved, and then needing to do another raise on a lower valuation (a ‘down-round’).

Can you overcome five risks and create wealth?


If a company truly needs five million dollars to get to breakeven, investors that provide the first million are greatly at risk of the company failing to raise the remaining capital or of subsequent investors valuing the company at a lower price than the first investors, causing a “down round” in which the early investors are punished for taking the first risk. Of course, we are speaking of increased valuation of your company when we speak of “wealth.”

Startup Valuations – Again….


This morning I was reading one of my favorite daily compilations of articles (called Innovation Daily, subscribe here ) and came across another great short article on startup valuations called “ Seed Rounds: How to Pick a Valuation “ Joseph Walla, who I don’t know, wrote it. A founder is about to raise their first round and asking me how to value their company. [1]. Hopefully, it’s in high demand for good reasons, otherwise you risk a down round in the future.

A Cap is not a Valuation

Bryce Dot VC

Most had structured their seed rounds as bridge notes (a fancy term for a loan) that would convert to equity when the anticipated future round of funding closed. Many of the companies with notes we evaluated had valuation caps on them; meaning, if the new investor priced the round higher than the cap the seed investors would reap the benefits of a lower valuation given the earlier risk they’d taken.

An Inside Scoop on the Funding Environment and What it Might Mean for You

Both Sides of the Table

Six firms had expressed strong interest, two had strong champions already trying to test price and round size and one had made it clear they were planning to submit a term sheet the following week. With “uncertainty” taking hold, rounds were taking longer to complete. Investors had grown too used to the idea that any deal you funded would get marked up to a higher valuation in the next round and that’s clearly not always true. $30 million.

A Primer on Angel Investment ‘Simple Term Sheets’

Startup Professionals Musings

Venture capitalists and later round investors like the preferred convertible shares. This clause attempts to protect the conversion price of stock of angel investors, prior to additional financing, from being reduced to a price equal to the price per share paid in a later “downround. You can end up becoming very frustrated with the investors, or cause the venture to fail if you run out of seed capital before the angel round can be completed.

Wasted time is money lost.


It is not a strong bargaining position for the CEO to ask for money to complete a product promised for completion with the previous round of funding. And professional investors often penalize the company with lower-priced down rounds or expensive loans as a result. Close. There is a relationship between time and money that is more complex than most managers think.

A Year of Reckoning for Angels and Seed Funds

A Crowded Space

The majority of the seed companies they funded went on to raise later rounds at often big markups. We expect there to be an increase in down rounds, flat rounds, inside rounds and various pay-to-play scenarios. These inside rounds will lead to one of a few possibilities: 1) No insiders are supportive. These companies shut down. A 5% equity stake could get cut down to 1%.

Some Thoughts and Models Around Ownership Targets

This is going to be BIG.

If you’re a first check lead VC for pre-seed rounds in New York, you can keep your head on when it comes to price, but in SF if you’re trying to fund companies from YC, good luck with your price discipline. If you raise $100mm, you can’t put it all to work upfront because the rounds aren’t big enough—so you have to raise more capital. Funds that lead Series A, B, and C rounds have serious capital needs. It doesn’t take into consideration options, down rounds, or recaps.

LP 92

What is the Right Burn Rate at a Startup Company?

Both Sides of the Table

” Stay lean and only raise a big round if you DO find product / market fit and which point you want to loosen the belt quickly and raise the capital to do so. Of course a lot of this also comes down to investor trust. Simply put – down rounds are very hard to achieve psychologically because insiders fight against them (rightly or wrongly) and outsiders have a mental gap that if your valuation is going down your company is forked up and they often just pass.

Premature scaling at Series B

The Equity Kicker

It all comes down to probabilities in the end – anyone can get lucky – the trick is getting a handle on how lucky your plan requires you to be… The article describes how it goes wrong in two ways, firstly: Your company is growing and scaling well, often on little invested capital. You fall into the spiral of death: head of sales gets replaced (at least once), CEO gets replaced (at least once), a down-round financing happens (if lucky).


Feld Thoughts

Some will demonstrate strategically justifiable metrics and have fantastic ‘up round’ exits; others may see liquidation preferences kick in which will negatively impact founders and employees; others may fulfill the adage “IPO is the new down round” , which has been the case for more than half of the public companies on our list. The current usage of the word unicorn makes me tired. I could rant about it for a while, but that would make me tired of myself ranting about it.