Why Tech Startups Hate Taking ‘Down Rounds’

The down round is back, and for Silicon Valley entrepreneurs it’s about as welcome as a pandemic. Tech startups aim to attract a higher price every time they call on investors for fresh money, known as a funding round, because it helps stoke confidence that the startup is getting somewhere. Unlike publicly traded companies, which have stocks that fluctuate daily without necessarily raising alarms, a startup’s valuation is virtually set in stone until the next funding round. That means it’s painful when investors pull back and a young cash-strapped company is forced to take money at a lower valuation — a down round.

Beginning in 2022, a growing number of Silicon Valley startups confronted this predicament. As the share prices of big publicly traded tech companies fell sharply and higher interest rates made borrowing more expensive, venture capitalists became cautious and scaled back their investments. Startups that can’t afford to fund their operations for more than a year are particularly vulnerable.