When Investors Get Tough – Is “Down” the New Flat?

In the last installment, I examined the impact of a “flat” round. Today, we look at the dreaded “down” round – when valuation declines from one round to the next. What is an executive to do when the business takes a step backward in its trajectory and company shares are worth less? The far-ranging implications for existing investors, employees holding options and the public perception of a down round create a public relations challenge of epic proportions. In this blog, I will review the business implications for a down round, how to think about PR strategy for the round, and what you can expect from reporters who catch wind of the news. Ultimately – should you even announce a down round?  

Business Implications 
While conventional wisdom suggests that uninterrupted upward trajectory in valuation is the ultimate sign of success, in 2023, all bets are off. Once upon a time, down rounds signaled blood in the water and the acquisition sharks (especially those that come in with low-ball offers) – often PE firms – would soon follow. Given today’s business climate, this is not necessarily the case. In 2023, down-rounds may have just become the “new normal.” 

Analysts from Pitchbook found that acquisitions following down rounds are actually declining compared to buyouts and even IPO listings! They note that the unicorn IPO may not be in the cards for most companies that take a down round, but it could be a signal that the company does have a strong underlying business that may require some restructuring or other work to get it back on track. CB Insights termed these companies “flawed but fixable.”

Are down rounds just for companies that fail to launch and find product market fit? Nope. In fact, Chris Metinko at Crunchbase notes that many unicorns also fell victim to down rounds that slashed their valuation. For some, that unicorn status was fleeting. However, taking a down round can reset expectations for future growth given changing economic conditions. For companies that set their sights (and valuations) too high during the 2021 economic explosion, this approach may be most effective to getting the company back on a more sensible trajectory. 

There is an alternative to taking a “down” round – venture debt or other loans that often carry punitive terms and extremely high interest rates compared to a classic investment. More to come on that in future blog posts. 

PR Strategy Considerations 
If you must announce a down round, 2023 might be the best time to do it. Do not despair – especially if you have not announced valuation to date.  

  • Valuation: One of the reasons that your investors and PR team may caution you NOT to reveal valuation is to avoid just this moment – if no one knows your valuation, it is hard to see that a decline in valuation occurred! That said, a reporter may ask you outright if valuation increased or declined. Prepare an answer knowing that a failure to say the valuation increased reveals a flat or down round may have occurred (e.g. “While I can’t reveal details of the financial terms, given the current economic environment and circumstances in the industry at large, we’re pleased with this round.”) 
  • Misery loves company: Consider steps taken by others in your immediate sector and then in the broader tech realm. In March 2023, Stripe announced a new round and took a 50% valuation hit. Most savvy investors Stripe to be one of the best run software Unicorns on the market, so this leaves the door open (so to speak) for many others. Certainly down rounds are taking place at higher rates, but if your immediate competitors are announcing increased valuation, you do not want to be the odd man out. You may choose not to announce the funding if it creates an opportunity for your enemies to throw FUD and disrupt sales. However, if your investors signed a Form D, your funding is accessible in a database frequently checked by the media. Announcement or not, some media may find the transaction and have questions and / or write about it, and you will have no option to “control the message.”  
  • Business metrics: As with all funding announcements, the narrative is improved when you are able to share additional metrics that show business growth – ARR, customer retention, headcount growth, new customers, etc. Consider how you can tell a story of forward momentum, even if it is not as fast (or as much) as you anticipated when the economy was healthier. Perhaps this is the moment for a pivot. Tell that story as openly as you can to show that this is a growth moment for the business, not a death knell. 

Media Coverage  
Holden Spaht, managing partner at Thoma Bravo, calls for an end to the stigma surrounding down rounds. But how are reporters ACTUALLY responding?  

The title for this blog post was inspired by a comment made by Alex Wilhelm during a TechCrunch podcast. He discusses with colleagues Mary Ann Azevedo and Natasha Mascarenhas that markets continue to be rocky for investment, with no reprieve in sight.  

In the real world, it is a mixed bag. The examples below show some sympathy for running a venture-backed business in a challenged economy, but they are skeptical of the PR messaging around steep valuation declines all the same. 

Note: These are not 10Fold clients and were chosen purely at random.  

Stripe: As I mentioned earlier, this fintech giant made big headlines really with a stunning drop in valuation. Stripe nearly halves valuation to $50 bln following $6.5 bln raise (Reuters) and A Tech Giant Closes In on a Pricey Funding Round (New York Times).

Coverage of Stripe is no doubt driven in part due to the major decline and its previous notoriety as a “decacorn” – a company valued at more than $10B. While leading with the valuation drop, Reuters does note that part of the funding raise is being used to cover a large tax bill and buyout of employee shares – thought this did not come in official announcement from the company. The articles note that Stripe said it does not need the funds to run the business, but help it proceed toward IPO. The New York Times notes that this announcement from Stripe is a symbol of a larger trend in Silicon Valley related to tighter financial markets. Overall, it points to the economic pressures as a driver for this move, not any business issues, which Stripe no doubt was happy with. As mentioned earlier, most savvy investors believe Stripe is extremely well run.  

Klarna: Klarna confirms $800M rise as valuation drops 85% to $6.7B (TechCrunch) and Klarna valuation plunges 85% to $6.7 billion as ‘buy now, pay later’ hype fades (CNBC).

In the rollout of the news, Klarna points to the “worst stock downturn in 50 years” and points to the valuation of other publicly-traded fintech companies in comparison to soften the blow. TechCrunch notes this as a PR spin but does include the argument in its article. They begrudgingly acknowledge that fintech companies have faced valuation challenges, so Klarna is not alone. CNBC also notes Klarna’s attempt to downplay the valuation impact and quotes the comment around “the steepest drop in global stock markets” comment. What’s key to note here is that the reporters are looking for the rationale / explanation from the company’s executives and using it in the piece. 

Publications that cover venture funding are riddled with articles explaining why companies may opt to take a down round vs. other forms of funding. If you do face this tough decision, it’s clear that you are not alone in your dilemma and, unlike previous years, it doesn’t mean the end to your startup. Reporters are likely to note that it’s a common approach in this market, but they won’t flinch to challenge your justification of the drop if it does not hold water.  

Next up in our series: alternate forms of funding, including bridge loans. Watch this space! 

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