Raising venture capital is a critical milestone for startups, but not every funding round leads to a higher valuation. In some cases, a startup raises a new round at a lower valuation than its previous one—this is called a down round. While down rounds often signal investor caution, they’re not always a death sentence. For many startups, they serve as a necessary financial tool to extend runway and reset expectations.
Unlike public companies, where stock prices fluctuate daily, private startups are only revalued at funding events. That makes a down round a highly visible and scrutinized moment in a company’s trajectory. Investors, employees, and the market all take note, and the effects can ripple across ownership structures, strategic planning, and future fundraising efforts.
Historically, down rounds have been viewed negatively, seen as a sign of stalled growth or waning investor confidence. However, venture markets go through cycles, and in recent years, down rounds have become more common across industries, from biotech to SaaS to deep tech. By Q3 2023, 18.5% of all venture rounds were down rounds—up from just 5.2% in early 2022. Many high-growth startups, including those with strong fundamentals, have had to adjust their valuations due to market shifts rather than internal failures.
In this article, we’ll break down:
For founders, understanding down rounds is essential—not just to navigate potential valuation cuts, but to proactively manage investor expectations and financing strategy. While a down round isn’t ideal, it can be a strategic move that keeps a startup moving forward in a challenging market.
A down round occurs when a startup raises a new financing round at a pre-money valuation lower than its previous financing. A lot of jargon, huh? Here’s a simple way to define it: A down round occurs when a startup raises a new funding round at a valuation lower than its previous one. Much better.
Definitions out of the way, let’s break it down. When down rounds occur, it means investors are purchasing equity at a lower price per share, effectively reducing the company’s post-money valuation and diluting existing ownership. While down rounds can be unsettling for founders and existing investors (believe us, they are), it’s important to remember that they a natural part of venture capital cycles, and often reflect broader market shifts rather than a company’s failure.
For private companies, startup valuations aren’t set by daily stock trades like in public markets. Instead, they are reassessed at each round of funding, based on factors such as revenue growth, product milestones, market demand, and investor sentiment. When a company’s valuation declines between rounds, it usually signals that investors perceive greater risk, weaker growth prospects, or shifting market conditions.
While down rounds can happen in any sector, they are particularly common in capital-intensive industries like biotech, deep tech, and hardware startups, where product development cycles are lengthy and reaching profitability often takes years. Even high-growth SaaS companies have experienced valuation resets in downturns when revenue multiples compress, particularly between Series A and Series B rounds. If early projections were overly optimistic, or if a company burns through cash faster than expected, investors may push for a lower valuation to align with actual progress.
Understanding why down rounds happen requires looking at investor psychology and risk assessment. Venture capitalists don’t just evaluate a startup’s current progress; they consider market conditions, future growth potential, and competitive positioning. If risk outweighs potential returns, they may require the issuance of new shares at a lower valuation to compensate for uncertainty.
In the next section, we’ll explore the most common reasons startups across industries face down rounds, from macroeconomic shifts to company-specific challenges.
Down rounds don’t happen in isolation—investors lower valuations for a variety of reasons, ranging from macroeconomic shifts to company-specific performance. In some cases, a startup hasn’t met key milestones, making it difficult to justify a higher valuation. In others, external market conditions force a recalibration, even for well-performing companies.
Several factors contribute to down rounds across different industries:
Venture capital funding is cyclical, often tightening during economic downturns, rising interest rate environments, or public market corrections. When investors become more risk-averse, they favor startups with stronger financials and more predictable growth, making it harder for early-stage, high-burn companies to justify premium valuations. The 2022–2023 market reset led to widespread valuation cuts, with even established late-stage startups facing down rounds as VCs prioritized capital preservation.
Some startups raise at aggressive valuations during bullish markets, fueled by investor optimism and competitive deal-making. When the market corrects, these companies often struggle to maintain their valuation, leading to a down round as investors push for a more sustainable price.
The tech boom of 2020–2021 saw SaaS, fintech, and biotech startups securing record-high valuations, many of which faced inevitable downward adjustments in later rounds.
In milestone-driven industries like biotech and deep tech, funding rounds are often tied to specific R&D progress or regulatory approvals. If a company falls short of these targets, investors may adjust their valuation expectations accordingly. For SaaS and consumer startups, slower-than-expected revenue growth, higher churn rates, or difficulty scaling customer acquisition can lead to a lower perceived valuation.
Startups with high operating costs may be forced into a down round if they run low on cash before hitting their next major milestone. If existing investors hesitate to reinvest and new investors demand lower valuations, founders may have little choice but to accept less favorable terms. Hardware and capital-intensive startups, in particular, face this challenge due to significant upfront costs and long development cycles.
Investor appetite fluctuates across sectors—certain technologies or industries fall in and out of favor. A startup that raised easily two years ago may now face a crowded field, lower investor interest, or shifting industry trends, leading to a valuation adjustment. AI startups, for instance, saw a surge in funding in 2023, while consumer tech valuations declined as investors prioritized profitability over growth.
While these factors differ across industries, the underlying cause of a down round is usually the same: investors reassess risk and adjust valuations to align with market realities.
For founders, understanding these dynamics is critical—not just to anticipate potential valuation challenges but to navigate fundraising conversations strategically. In the next section, we’ll examine how investors think about risk, valuation, and deal structures when negotiating a down round.
Venture capitalists don’t just evaluate a startup’s current performance—they assess risk, future growth potential, and the broader market landscape before determining post-money valuation and whether a startup will raise at a higher or lower price.
Investors weigh multiple factors when adjusting post-money valuation and setting terms for down round financing:
A lower valuation isn’t always a bad sign—it can help a startup reset expectations, attract new investors at a more sustainable price, and align valuation with actual growth potential. However, if not managed well, a down round can damage investor confidence and impact employee morale.
The key for founders is understanding why investors are pushing for a lower valuation and how to negotiate terms that balance investor concerns with long-term company growth. In the next section, we’ll explore the different types of funding rounds—up rounds, flat rounds, and down rounds—and how they influence a startup’s trajectory.
Not all funding rounds lead to a drop in valuation. While down rounds receive the most scrutiny, startups can experience three types of funding outcomes:
The type of round a startup experiences depends on multiple factors, including revenue growth, milestone achievements, and external market conditions.
Up rounds indicate investor optimism. They typically occur when a startup:
However, not all up rounds are sustainable—some startups raise at inflated valuations during hype cycles, only to face down rounds later when market conditions shift.
A flat round can suggest that investors still believe in the company but need more evidence before assigning a higher valuation. It may occur when:
While flat rounds avoid the dilution of a down round, they can still indicate a cautious investor environment, particularly for startups that previously raised at aggressive valuations.
A down round occurs when investor sentiment shifts, making it harder to justify previous valuations, leading to a lower price per share and increased dilution for existing shareholders. Unlike up rounds, where founders retain strong negotiating leverage, down rounds often come with investor-friendly terms such as:
However, not all down rounds are negative. Sometimes, when handled appropriately, a down round can serve as strategic reset, aligning post-money valuation with actual company progress while allowing the startup to raise new financing under more sustainable terms, which will (ideally) allow for more sustainable future growth. The key is structuring a down round in a way that preserves founder and employee incentives while securing necessary funding.
For startups facing a potential down round, understanding the trade-offs between valuation, control, and dilution is critical. In the next section, we’ll explore broad strategies founders can use to manage a down round while maintaining long-term stability.
A down round can be challenging, but it doesn’t have to be catastrophic. While a lower valuation leads to dilution and may raise concerns among investors and employees, how founders handle the situation often determines whether the company emerges stronger or struggles to recover. Successfully navigating a down round requires strategic planning, financial discipline, and clear communication.
Founders don’t have to accept the first valuation investors offer. Strengthening the startup’s position before negotiating can help minimize dilution and secure better terms, such as avoiding harsh anti-dilution protection clauses or negotiating a more favorable number of shares issued in the round. A few tactics include:
A down round signals that investors expect greater financial discipline. Startups that demonstrate capital efficiency are more likely to retain investor trust and reduce future funding risks. Key strategies include:
While valuation is a key concern in a down round, deal terms can often have an even greater impact on long-term outcomes. Founders should:
Down rounds don’t just affect cap tables—they can impact company culture and employee retention. Employees with stock options may feel demotivated if their equity becomes less valuable, especially if the share price drops below their option strike price, making it crucial for leadership to maintain trust and motivation.
How a down round is perceived—by investors, employees, and the market—can shape the startup’s future fundraising prospects. Instead of framing it as a setback, founders should position it as a strategic reset that enables sustainable growth.
A down round doesn’t define a startup’s success—how the company responds does. In the next section, we’ll explore key takeaways for founders looking to emerge stronger and position their company for future growth.
A down round can be a difficult moment for any startup, but it doesn’t have to define the company’s future. Many successful startups—across biotech, SaaS, deep tech, and other industries—have navigated valuation resets and gone on to raise stronger rounds, scale effectively, or even exit successfully. The key is how founders respond to the situation.
Key lessons for startups facing a down round:
While raising at a lower valuation is never ideal, it can be a strategic move to ensure a startup’s long-term survival and growth. Founders who take a disciplined approach to capital management, investor relations, and operational execution can turn a down round into a stepping stone rather than a setback.
