What is Down Round?
348 reads · Last updated: December 5, 2024
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.Simply put, more capital is needed and the company discovers that its valuation is lower than it was prior to the previous round of financing. This "discovery" forces them to sell their capital stock at a lower price per share.
Definition
Down round financing refers to a situation where a private company sells additional shares at a lower price than in the previous funding round. Simply put, the company needs more capital and finds its valuation lower than before the last round of financing. This 'discovery' forces them to sell their shares at a lower price per share.
Origin
The concept of down round financing developed with the rise of venture capital and startups. Early-stage startups often rely on multiple rounds of financing to support their growth and expansion. A down round may occur when market conditions or company performance do not meet expectations.
Categories and Features
Down rounds are typically categorized into two types: proactive down rounds and reactive down rounds. Proactive down rounds occur when a company chooses to accept a lower valuation to quickly secure funds, while reactive down rounds happen due to market or internal company issues forcing a lower valuation. Features include shareholder dilution, decreased company valuation, and potential loss of market confidence.
Case Studies
A typical case is WeWork's down round in 2019. Due to overvaluation and questions about its business model, WeWork was forced to raise funds at a lower valuation than before. Another example is Juul Labs, which faced a down round in 2020 due to regulatory issues and declining market share.
Common Issues
Common issues investors face with down rounds include concerns about whether the company will continue to decline and whether it is worth continuing to invest. Investors typically need to assess the company's long-term potential and market environment to decide whether to continue supporting the company.
