Given the fact that fewer than 1% of startup founders fail to raise outside capital and that less than ten per cent of the one per cent ever generates venture level returns, it is very likely that the remaining ninety per cent of funded startups will have to consider raising a down round at some point. The truth is that down rounds are like chemotherapy for a cancer patient. You lose your hair and your lunch, but if it works you live to fight another day.

Sadly the truth is that the success rate for chemotherapy is around 2.1% — a success rate far higher than the rate for down rounds — around .0002%. As if on cue, WeWork is threatening to go forward with their IPO despite the fact that they’ll be taking a $10–15 billion cut in their valuation — a painful haircut for Softbank, their biggest investor.

The truth is that very few startups, much fewer unicorns, succeed after experiencing a down round. The funding climate is frothy, especially these days, and the inability to raise capital at ever-increasing valuations is a huge red flag for investors. According to Pitchbook down rounds are at their lowest point in a century. The sad fact is that if your startup is facing a down round the best options are either to shut it down or to find a buyer — taking on additional venture capital at a lower valuation is the kiss of death.

 

 

This reality is the reason I think WeWork has no other choice but to move forward with its IPO even though Softbank is very much opposed to the plan. If WeWork remains private they’re going to struggle to raise capital and they’ll face even harsher terms than they’re getting from the public markets. The CEO and founder have already cashed out so his primary focus should be keeping the company afloat and an IPO is likely the only way forward.

Of course, given the fact that startup founders typically have only 2–3 times at bat it almost never makes sense for the founders of pre-IPO startups to ever consider taking a down round. If a startup has enough money in the bank to stay in business and yet can’t raise additional capital at ever-increasing valuations it is time for the CEO and founder to step down and start something new.

If the founder does it right the investors will appreciate their decision and revel in the prospect of being able to hire a new CEO giving their investment a second chance at success. Of course, statistically, the startup will limp along for years and ultimately provide very little, if anything, in the way of a return for the common shareholders. Fortunately, the original founders will have started their next startups and preserved their investor and employee relationships.

Unfortunately, WeWork has very little choice but to raise a down round. But that doesn’t mean that you should follow suit. Raising a down round is a fool’s effort — unless you’re a hired gun (i.e. a CEO hired by a VC) you should never waste your time working on a failed startup.

 

Rahul Krishna

Rahul Krishna

Rahul is a serial entrepreneur has two decades of experience in hiring competent workforce globally. Trying to solve a business problem for startups and young Entrepreneurs by a Coworking Model - Empowerers Coworking City. He is passionate about developing ideas which carry an impact, building human relationships & inspiring people to do amazing things.

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