For Silicon Valley startups, valuations are dropping even if the sky is not (yet) falling. The law firm Cooley reported this week that it has seen more “downrounds,” fundraising rounds where a company’s valuation has fallen, than anytime since 2011.
In the latest quarter, 21% of Cooley’s rounds were downrounds, almost three times than the previous quarter and the highest in five years, the firm said. It reported on 154 deals worth $1.8 billion in the second quarter. “It will be of particular interest to see if this becomes a trend in future quarters,” the firm said.
Downrounds are piling up as previous years’ overheated funding environment cools off. “A downround was previously considered catastrophic,” writes startup tracking firm Mattermark. “Today it is almost expected.” Public companies such as Square have gone public at lower-than-expected prices, and CB Insights has documented 76 such rounds since 2015 on its Downround Tracker.
Investors are advising startup founders to learn to love their lower valuations. An April post by venture capitalist Bill Gurley riled the investment community by warning that the quest for a $1 billion startup valuation was distorting the fundraising market. He advised CEOs to accept lower valuations rather than bad financing terms that preserve their valuations. “The only thing you are protecting is image and ego, and in the long run they absolutely do not matter,” he wrote. “You should be more concerned about the long-term valuation of your shares, and minimizing the chance that you have the whole thing taken away from you.”
The shakeout of overpriced startups is not putting a dent in the high performers, says Sandy Miller, a partner at Institutional Venture Partners. “I think it’s a healthy correction,” he said in an interview. “At the high end of the market, we’re not actually seeing down rounds. We’re seeing flat rounds…Money is still available.”