For startups that rode the tech boom to soaring valuations, few things are harder to swallow than the dreaded down round. It happens when backers throw fresh money at a fast-growing business and demand more equity than previous investors got for a similar amount of cash. The result is a decline in value-sometimes by an embarrassing amount.
It's such a badge of dishonor in Silicon Valley (not to mention alarming to employees with stock options) that private companies and investors are coming up with inventive workarounds. Private markets have few disclosure requirements, so most of the maneuvers aren't made public. "What they try to do is sort of defeat reality," Tom Slater, a Baillie Gifford fund manager whose firm buys stakes in private companies, said at a conference earlier this month. "Do you want to accept reality that your valuation has fallen by 50%? Because that's potentially quite disruptive internally."
Structuring deals with confidential perks, such as promising investors discounted shares in a potential public offering, is one way to avoid a down round, says Next Round Capital Partners founder Ken Smythe, who helps startups obtain financing. "Everyone is trying to avoid marking their company down," he says. "There are many flavors to these structured deals, but what's constant is that it's unpriced, so you're basically kicking the can down the road on the valuation."
Last year was especially tough on cash-starved startups. The amount of money invested in private companies in the first nine months of 2022 dropped 33% from the same period in 2021, according to GlobalData Plc. By the end of November, investors were getting shares of closely held companies in the secondary market at a record 50.5% median discount off the price set in the most recent funding round, says Forge Global Holdings Inc.
Diese Geschichte stammt aus der January 30, 2023-Ausgabe von Bloomberg Businessweek US.
Starten Sie Ihre 7-tägige kostenlose Testversion von Magzter GOLD, um auf Tausende kuratierte Premium-Storys sowie über 8.000 Zeitschriften und Zeitungen zuzugreifen.
Bereits Abonnent ? Anmelden
Diese Geschichte stammt aus der January 30, 2023-Ausgabe von Bloomberg Businessweek US.
Starten Sie Ihre 7-tägige kostenlose Testversion von Magzter GOLD, um auf Tausende kuratierte Premium-Storys sowie über 8.000 Zeitschriften und Zeitungen zuzugreifen.
Bereits Abonnent? Anmelden
Instagram's Founders Say It's Time for a New Social App
The rise of AI and the fall of Twitter could create opportunities for upstarts
Running in Circles
A subscription running shoe program aims to fight footwear waste
What I Learned Working at a Hawaiien Mega-Resort
Nine wild secrets from the staff at Turtle Bay, who have to manage everyone from haughty honeymooners to go-go-dancing golfers.
How Noma Will Blossom In Kyoto
The best restaurant in the world just began its second pop-up in Japan. Here's what's cooking
The Last-Mover Problem
A startup called Sennder is trying to bring an extremely tech-resistant industry into the age of apps
Tick Tock, TikTok
The US thinks the Chinese-owned social media app is a major national security risk. TikTok is running out of ways to avoid a ban
Cleaner Clothing Dye, Made From Bacteria
A UK company produces colors with less water than conventional methods and no toxic chemicals
Pumping Heat in Hamburg
The German port city plans to store hot water underground and bring it up to heat homes in the winter
Sustainability: Calamari's Climate Edge
Squid's ability to flourish in warmer waters makes it fitting for a diet for the changing environment
New Money, New Problems
In Naples, an influx of wealthy is displacing out-of-towners lower-income workers