Link to original article: Down rounds are rising. History shows things could get much worse
Nearly 11% of VC deals this year have been down rounds, a sharp reversal from the more than two-decade low of 6.64% in 2022 and the highest rate since 2020, according to PitchBook data.
But history shows the worst could be yet to come. The rate of down rounds during the dot-com bust topped 58%; in the aftermath of the 2008 housing crash, it rose to nearly 36%, our latest quantitative perspectives report shows.
Some of the startup world’s best known names have taken down rounds, helping to reduce the stigma around these financings. Ramp, a finance automation specialist, swallowed a 30% cut to its valuation last month with a $300 million funding round led by Thrive Capital and Sands Capital.
VC funds are deploying their dry powder more cautiously as LPs have pulled back from venture, public tech stocks have fluctuated and interest rates have risen. The power balance has shifted from a founder to an investor-friendly environment, thus bringing valuation multiples down from their 2021 heights.
Some investors say down rounds are happening sporadically, and may only take off in full force next year. “The down rounds are happening here and there, but not to the extent that people might think,” said Rajeev Dham, managing partner at Sapphire Ventures.
Companies that raised during the venture frenzy of 2020 and 2021 were able to secure fresh capital with high revenue multiples, particularly in the fintech, cloud and enterprise SaaS verticals. If startups failed to reduce their cash burn when the fundraising market turned sour in mid-2022, they’re likely now having to come to terms with taking funding at a major discount to their last valuation.
The exception to this rule is in the buzzy field of generative AI startups, where VCs, driven by conviction or fear of missing out, are still entertaining deals at highly sought-after companies.
Out of the data available, 144 of 1,325 VC deals with known valuations have closed at a down round this year as of August 29. However, the data doesn’t paint a complete picture. Reporting of down rounds is often delayed, and private venture-backed companies are not obligated to publicly disclose a round’s valuation.
As down round rates during historic bear markets indicate, there is still plenty of room for venture-backed companies to fall further.
“My prediction is this time next year, Q2 and Q3 of next year, is when you’re going to see a lot more [down rounds],” Dham said.