Dealing with a Down-Round

Facing a down-round? 📉 It’s not the end—here’s how to turn it into a powerful comeback with transparency, resilience, and strategy!

Frederik van Lierde - Sep 04, 2024

Articles

In the startup world, ups and downs are part of the game. In our previous articles, we talked about how to handle it when a VC asks about your startup’s valuation and how to get ready for those important valuation discussions.

But what if things don’t go as planned and your valuation drops below what it was before?

This article is all about facing a down-round. We’ll look at how to communicate with investors, keep your team motivated, and turn a tough situation into an opportunity to move forward.

Table of Contents

Be Transparent with Your Team and Investors
Reframe the Narrative
Focus on the Fundamentals
Keep Morale High
Rebuild Momentum
Learn and Adapt

Facing a down-round — a situation where your startup’s valuation drops below what it was in previous funding rounds — can feel like a major setback. It’s a tough pill to swallow, but it’s not the end of the road.

How you manage this situation can make all the difference in your startup’s trajectory. Here’s how to handle a down-round with clarity and resilience.

1. Be Transparent with Your Team and Investors

The first step is honesty. Your team and investors need to hear the news from you, not through rumors or third parties. Schedule a meeting with your existing investors to explain the situation. Outline the reasons behind the lower valuation — whether it’s due to market conditions, missed milestones, or other factors.

For example, if your industry is experiencing a downturn, acknowledge that it’s impacting everyone, not just your company. By being upfront, you build trust and show that you’re not shying away from tough conversations.

2. Reframe the Narrative

A down-round doesn’t have to be a signal of failure. It’s important to reframe the situation positively. Emphasize the opportunities that come with new funding, even at a lower valuation. Highlight what this investment will allow you to do — whether it’s extending your runway, accelerating product development, or expanding your market reach.

For instance, you could say, “While the valuation is lower this round, this investment gives us the resources we need to focus on scaling our core product and reaching profitability faster. We’re now in a stronger position to execute on our long-term vision.”

3. Focus on the Fundamentals

In challenging times, it’s advisable to return to the basics. Focus on improving your core business metrics — revenue, customer retention, and product development. Use the down-round as a chance to tighten operations and demonstrate progress.

Investors want to see that you’re committed to the business and are making strides despite the valuation dip.

For example, if you’re able to improve customer acquisition costs or boost monthly recurring revenue, make sure to communicate these wins to your stakeholders.

4. Keep Morale High

A down-round can hit team morale hard. Your employees might worry about the company’s future or the value of their stock options. As the founder, it’s your job to keep spirits up. Be open about the situation, but also remind your team of the company’s mission and long-term goals.

Consider revisiting the equity structure to ensure that employees are still motivated.

For example, offering additional stock options or adjusting existing ones to align with the new valuation can help maintain morale and keep everyone focused on the bigger picture.

5. Rebuild Momentum

Once the down-round is behind you, it’s time to rebuild momentum. Set clear, achievable goals for the next quarter and beyond. Communicate these goals to your team and investors, and track progress closely.

For example, if your focus is on customer acquisition, outline specific targets and the steps you’ll take to reach them. As you hit these milestones, share the successes to rebuild confidence and demonstrate that the company is back on an upward trajectory.

6. Learn and Adapt

Finally, use the down-round as a learning experience. Reflect on what led to the lower valuation and what you can do differently moving forward. Was it a matter of overestimating growth? Did market conditions change unexpectedly?

For example, if you missed key milestones that led to the down-round, reassess your planning and execution process. Adapt your strategy to avoid similar pitfalls in the future, and be ready to pivot if necessary.

Why we care?

Dealing with a down-round is challenging, but it’s also an opportunity to show resilience, recalibrate your strategy, and steer your startup back on course. By being transparent, reframing the narrative, and focusing on the fundamentals, you can navigate this difficult situation and come out stronger on the other side.