Dealing with the Down Round
At first it’s a trickle, then a deluge. After being valued at over $5B last year, the Crypto financial services firm BlockFI is reportedly in the process of closing a down round valuing it at just $1B. This may be a signal the carnage that’s hit public tech is finally bleeding over into private markets.
Legendary Entrepreneur, Investor, and Venture Capitalist Howard Lindzon calls it the The Down Round Reality and says “I liken this moment in the private markets to the Wile E. Coyote moments in the cartoon where he is out past the cliff and still spinning his legs …right before the plunge.”
And TechCrunch says founders are facing a Hobson’s choice between maintaining high-flying valuations — or conducting a “down round’. Experts suggest the latter makes the most sense; with prominent venture capitalist Brad Feld advocating that founders embrace the down round in those cases where you need the capital, but haven’t yet grown into a previous valuation.
In fact, your syndicate configuration may leave you with no choice. Brad says, “…if you can do a clean financing at a lower price, I always think that’s a better option for everyone (founders, employees, and existing investors.)”
Howard says we’ve had a fantastic up-cycle, but this painful pullback we’re seeing is likely not over; founders and investors should be asking if this is just the beginning. And Brad is hoping for a short-lived downturn/adjustment, but fears it won’t be.
*This post originally appeared in the Social Leverage Letter.