How to survive a down round

It is not the best of times for startups in India. If 2019 saw them raise a massive $14.5 billion, 2020 has turned out to be a nasty curve ball, thanks to the COVID-19 pandemic. According to the tech-industry-focused publisher, TechCrunch, several global and local private equity and venture capital firms have “cautioned that the current changes to the macro environment could make it difficult for a startup to close their next fundraising deal.”

A down round, in which the pre-money valuation is lower than the post-money, could be on the cards for many startups. A startup is usually faced with a down round when it does not meet investor expectations, or is particularly vulnerable after burning up its cash. The COVID-19 pandemic, though, has put even startups that are delivering on their metrics on a sticky wicket.

A down round can be extremely disheartening for the equity shareholders and particularly, founders, who run the risk of significant dilution in their stake. However, it’s important to acknowledge that like ups and downs in life, this, too, shall pass and the future could be much brighter than you anticipate! All you need is a solid plan to navigate through these unprecedented times.

An obvious way to avoid a down round is cost-cutting, or, if the cash flow problem is temporary, bridge financing, in the form of a short-term loan, can be helpful. But what should a firm do when the dreaded down round hits home? Here’s a quick guide to surviving a down round.

Go back to the basics. Critically analyze reasons for underperformance and how you would address it. Be true to yourself.

Take bold steps. And don’t shy away from correcting your course. Seek professional help where you see roadblocks or don’t have a clear direction.

Adapt to advance. The way we operate is set to change significantly. Adjust your plans to emerging needs.

Manage your cash wisely. Regularly assess the health of your company by reviewing not only the balance sheet and income statements, but also by keeping a close eye on the cash flow statement. There are several tools and ratios to analyze if you are operating efficiently or not. Leverage them.

Stay on top of agreements for better negotiations: Know the rights of each shareholder in the company. Though most shareholder agreements provide for an anti-dilution clause, remember that it is an “option” given to protect investor rights. Hence, you do stand a chance to convince your existing investors to relinquish the same, in light of the extraordinary situation we are in. You can do this by highlighting the impact of COVID-19 where possible, along with presenting a sound and realistic workaround plan.

Maintain transparency. Keep communication channels open within your firm and with your employees.

The silver lining is that people still trust you and, hence, are willing to invest in your company during these unpredictable times. Move ahead confidently to realise your dreams.

by user
LinkedInFacebookWhatsAppTwitter