Downround – The Most Important Problem (by Ondrej Fryc)
6. 2. 2019
6. 2. 2019
Yesterday, I’ve published a post related to issues with so-called “downround”. But I’ve forgot the most important thing:
Nobody likes downrounds. Not even a new investor.
In our example from yesterday; you start fundraising and go on roadshow. But now it’s very different from last time, when you talked about the bright future, all the fabulous metrics, the potential etc. Now everyone is focused on problems. You will be defensive all the time. You will talk about what is wrong, why, what the original investor says about it, if it can happen again… everything wrong! Spirit is lost. Yet your company is still awesome! Just not that awesome to support the $30m+ valuation. But no-one cares. You have a downround. You may think you offer a great deal for the new investor, that you offer a discounted valuation… but in reality, you present a problem. In such an atmosphere it is almost impossible to excite someone.
Not so long ago I met a company that was exactly in this position. Super product, people, industry, all good … to the point that their original investor a bit overshoot the valuation at the beginning and set the bar too high. It ended so we did not even give them a term sheet. Because giving termsheet should always be an exciting moment, and you just simply cannot submit an exciting downround termsheet.
Investors do not want to buy companies that are not doing well. Investors want to be on the hockey stick curve. And no valuation discount will solve it.
If I summarize the two articles about downrounds: If you excite the first investor too much with your great projection and he gives you too high of a valuation, it’s a short-sighted victory. In the long run, you made a mistake, which can even be fatal.