A downround is an event wherein a company raises capital at a valuation that is lower than the previous round valuation.

Downrounds occur for several reasons.

1) The company’s outlook has deteriorated as compared to the previous valuation rounds

2) The market conditions may have deteriorated and coincidently the company needs to raise capital urgently. In this situation, the company may raise capital at a valuation that is lower than what it witnessed in previous rounds.

Raising capital is essential for companies in growth phase and sometimes companies raise capital in downrounds is the only available option. In such a scenario, keeping the company alive is more important by taking the capital rather than optimizing for valuation. Therefore, companies opt to raise capital in downrounds if that is the only option available.

 

Disclaimer: Vitspan does not provide any investment related, tax related or financial advice. The information presented is done so without considering the investment objectives, risk profile, or economic circumstances of any reader or investor. The information presented may not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the potential loss of principal. Please consult your financial advisor prior to making investment related decisions.