Private Markets Don’t Like to Go Down

A stereotype about private tech investing is that companies are not supposed to do down rounds. If you are a tech startup, and you raise some money from venture capitalists at a $250 million valuation, and then a year later you want to raise more money, you had better have a $500 million valuation. If the market is tough, $250 million, I guess. But if you go out to raise money at a $150 million valuation, after previously raising at a $250 million valuation, that is very bad. Venture investors want growth, they want positive momentum, they do not want a discount. If your valuation has gone down, that’s a bad sign for your future.

This is mostly just a set of social conventions. Public companies don’t work this way: If they want to raise money, they sell stock at whatever their stock price is. It would be somewhat silly for a public company to say “we can’t raise money by selling stock because our stock price is lower than it was six months ago,” or for a mutual fund to say “we can’t buy your stock because the price has gone down.” But in private markets it’s a thing.