Home Startups We must destigmatize down rounds in 2023 • businessroundups.org

We must destigmatize down rounds in 2023 • businessroundups.org

by Ana Lopez
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A new year is just around the corner, and with it comes uncertain and uncomfortable market conditions. Those conditions come with equally uncomfortable decisions. For startup founders, determining the right path for their company may require a fundamental rethinking of how they measure success.

The business climate in 2023 will be unfamiliar to many who have founded a company in the past decade. Until now, a seemingly endless stream of relatively cheap capital has been available to any startup that the VC world believes has great growth potential. Everyone wanted a piece of “the next Facebook.” With interest rates approaching zero, the risks were relatively low and the expected rewards astronomical.

Burning money to chase growth became the norm; you would just raise more money if you ran out. Debt? Who needs it! Existing investors were happy to play along, even if their stake in the company had somewhat diluted – rising valuations kept everyone satiated.

Over the years, this pattern of soaring valuations and a pie growing fast enough to offset any dilution – fueled by “free money” justifying almost any investment – ​​crystallized into a mythology at the heart of startup culture . It was a culture in which almost everyone from founders and investors to the media participated.

Rising valuations made for great headlines, sending a signal, both to potential employees and to the markets, that a company had momentum. High valuations quickly became one of the first things new investors looked at when it was time to raise additional capital, whether through a private funding round or an IPO.

The financing route you choose has huge implications for the future of your business; it should not be clouded by ego or driven by media lust.

But tough economic conditions tend to dispel complacency with the harsh reality, and we’ll see the reality show up this year when it comes to funding. Amid rising interest rates and a generally negative macroeconomic outlook, the tap will run slowly –– or not at all. Capital financing is no longer cheap and plentiful, and as the drought hits, a sense of dread will grip the founders. They can’t burn money anymore without thinking seriously about where to get more when it runs out.

When that time comes, founders will face a choice that can make or break their company. Are they turning to alternatives like convertible bonds, or are they approaching new investors for more equity? Tech stocks have been in trouble for the past year, which could mean their company’s value has taken a hit since the last time they raised capital, giving them the prospect of the dreaded down round.

It’s easy to see why down rounds seem out of the question for many startup founders. To begin with, they face the flip side of the positive media frenzy, which threatens to erode employee morale and investor confidence. In a culture where rising valuations are worn like a badge of honor, founders may fear that taking a down round would make them pariahs in Silicon Valley.

Down rounds don’t mean the end of your business

The truth is that there is no one-size-fits-all solution. The funding route you take has huge implications for the future of your business and so should not be clouded by ego or driven by media lust.

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