The dreaded down round is trending upward, again, after startup valuations got a brief reprieve at the beginning of the year.
More than 14% of all venture capital deals nationally that closed between April and June had valuations that dropped from the startup's previous funding round, according to new PitchBook data. That's almost double the rate of the first three months of the year, which saw 7.5% of deals have down rounds.
It's the highest quarterly rate of growth for down rounds in a decade, according to the data. But the worst of it likely hasn't hit yet.
"You would probably expect the majority of rounds to be happening to be down rounds, but we're not really seeing that right now," PitchBook analyst Vincent Harrison told me. "A lot of these companies that would be raising down rounds haven't yet returned to market, and so we probably won't see a spike in down rounds until probably the end of this year or the beginning of next year when that runway runs out."
While 14% doesn't set a record for the quarter with the highest proportion of down rounds (that crown goes to the third quarter of 2013), it's a sign that the private markets continue to be more selective and investor-friendly while founders struggle to manage burn rates and extend their runway. A down round means that new investors get more company for their money — but it also means founders, earlier investors and employees holding stock options all see their wealth shrink, at least on paper.
The proportion of down rounds could actually be even higher because companies aren't required to disclose them — and often don't, Jeffrey Grabow of consulting firm Ernst and Young told me.
"It could be understated," Grabow said, and "if you’re an entrepreneur, you’d prefer not to do a down round."
Examples from the second quarter include Sam Altman's San Francisco-based crypto company Worldcoin, which raised a $115 million Series C round in May, and according to PitchBook, Worldcoin's valuation dropped to $2.3 billion this year, nearly $1 billion less than the $3.2 billion valuation it received in February 2022.
Worldcoin said those numbers are "not accurate," but declined to offer clarification.
San Francisco-based Instacart has slashed its own internal valuation several times since early 2022. As of April, Instacart's valuation was reportedly $12 billion, up slightly from its low but still down from a high of $39 billion.
South San Francisco-based financial services giant Stripe also chopped down its valuation last year to $74 billion from $95 billion, and then again in April when it raised a $6.5 billion Series I round at a valuation that dropped to $50 billion.
Grabow advises startup founders to raise a new round if they need capital, even if it's a down round, because the alternative could be going out of business.
"We’re back to more of a normalized startup environment," Grabow said. "If you’re in the middle of it, it can feel really bad, but you can’t have a bull market forever."
In 2022, down rounds dropped to 4.8% of all deals in the first quarter — the lowest it's been over the past decade — and steadily crept up, increasing to 5.9% in the second quarter, 6.9% in the third quarter and 11% in the final quarter, according to PitchBook.
Valuations then recovered a bit in the first quarter of 2023 when the proportion of down rounds dropped to 7.5%, although that still represents a 56% increase over the same period in 2022.
