In short, a down round occurs when investors think your company is worth less than the last time you raised money.
Brad Horowitz, partner of
He says markets are emotional, not logical, which is why they fluctuate. In today's down investing climate, he likens founders who are struggling to raise capital to the captain of the Titanic. They've hit an
Raising a down round isn't the end of the world, says Horowitz. If you're burning through investors' money and don't yet generate revenue, there's no choice but to raise at a lower valuation. "You need to figure out how to stop the bleeding, as it is too late to prevent it from starting," Horowitz writes. "Eating shit is horrible, but is far better than suicide."
Down rounds can create issues founders need to deal with if they want to right their sinking ships. Employee moral often takes a toll. "If you raise money at a lower price, your people will likely not only freak out, but possibly believe they were lied to," Horowitz writes. Founders need to explain
Horowitz suggests saying something such as, "
He ends with a final reminder to startups that cash is king. If you don't make money, you'll need to pray for an acquisition.
"If you generate cash, investors mean nothing. If you do not, then your success will depend upon the kindness of strangers."