Key takeaways
- Potential investors may read down rounds as signs of a struggling business, but that’s not always the case.
- Venture-backed companies that have down rounds can also continue to grow, either through raising new rounds or by undergoing a restructuring post buyout.
- Late-stage companies that go through a down round can offer serious advantages to their buyers, in the form of a capital pool or experience in their target markets.
Potential investors may read down rounds as signs of a struggling business, but that’s not always the case. For example, only about 13% of the US companies that raised a down round from 2008 to 2014 were unable to raise a new round or exit immediately after, according to a recent PitchBook analyst note.
Venture-backed companies that have down rounds can also continue to grow, either through raising new rounds or by undergoing a restructuring post buyout. Moreover, many of these companies are more likely to be acquired by a private equity firm following a down round. In fact, nearly 1 in 5 of the companies were bought out by a private equity firm, while within the broader venture capital industry, this number was around 11.5% for company exits since 2016.
Kyle Stanford, a senior analyst at PitchBook, said this difference highlights the change in investor expectations for companies that have raised a down round.
“…buyout firms come in and buy companies that are strong underlying businesses that just need to be restructured,” said Stanford.
Most of the late-stage companies that go through a down round also offer serious advantages to their buyers. For example, they usually come equipped with an initial source of capital and some experience in their markets, which means the burden isn’t on the PE firms to supply either. In most cases, companies have tried and tested their product in their targeted markets, which again relieves the PE firms of conducting these initial tests. Post buyout, the PE firms start out with substantial data on the company’s true financial performance, product fit and addressability of their markets, rather than depending on future visions for an idea or a technology, which makes the restructuring process all the more efficient.
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