Common sense says a downround is the last thing you want for your company. But downrounds have a silver lining.
First, what is a downround? The term refers to raising money at a lower valuation than before. It signals that you may have missed some of your targets. This could upset investors and frustrate your team. Despite these challenges, downrounds are not all bad news. They often show your company can attract investment, even in tough times. Only companies with real promise can navigate through a downround and emerge stronger.
A Downround Means You’re Doing Something Right
When venture capitalists back you during a downround, it indicates strong confidence in your startup’s potential. They wouldn’t invest if they believed your company would fail. This means your business still has potential and room for growth.
Receiving seed funding at a lower valuation shows your startup has valuable qualities. Your investors’ willingness to inject cash underscores their belief in your long-term success.
Venture Capitalists Don’t Want to Do Downrounds
For a startup to get approval for a downround, the company needs to meet a high bar set by VCs. Venture capitalists face numerous challenges with downrounds, including:
- Legal complications
- Financial difficulties
- Pay-to-play requirements
- Given the damage control needed, only truly promising startups are considered for downround funding.
Staying Positive During a Downround
It’s easy to feel sad or worried about the future during a downround. But stay positive! Venture capitalists usually avoid downrounds. If you’re in one, it shows your startup still has potential and resilience.
Think of it as a chance to address key issues, like your company’s valuation. With some effort, you can boost your startup’s standing. Embrace the challenges, learn from criticism, and see this as a step toward improvement.
Success After the Downround
Once you fix your CAP table, people will move on quickly. If your company achieves an IPO or another exit, the narrative will change. People will praise your ability to navigate challenging times. Your board’s support will be highlighted, and your achievement will be seen as a success.
Embrace the journey. If your company reaches an IPO or exit, it will overshadow all past challenges. Your story will become one of perseverance and leadership. Overcoming a downround can lead to significant achievements.
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