Startups

Down rounds are a ‘ticket to try again,’ says founder who raised 3 in a row

Comment

down round, valuations, startups
Image Credits: Getty Images

For the past year, everyone’s been predicting that the muted exit environment and bone-dry funding market would bring a reckoning for many late-stage companies.

We’ve been seeing layoffs and cost-cutting measures across the board as companies look to shore up their balance sheets. And now, an increasing number of companies are raising money at lower valuations than their last investment. Unfortunately for startups, it seems these down rounds are here to stay.

Earlier this week, Alex Wilhelm dove into new Q1 data from Carta, which showed that the number of down rounds had nearly quadrupled in Q1 2023 compared to the same time last year.

Down rounds carry a negative connotation and are often interpreted as the fault of the company or founder. But in a market where everything seems to be heading downward, they shouldn’t imply a company or its founders made a mistake — you often simply can’t help it. To VCs’ credit, many investors have been vocal over the last year about how companies shouldn’t give in to this stigma.

This market cycle hasn’t seen a company raise a down round ahead of a successful exit yet, but startups contemplating that possibility should take heart because companies have overcome this hurdle in the past. Meta, known as Facebook at the time, is probably the best-known example. The social media company had raised a down round in 2009 before it went public in 2012 at a $104 billion valuation.

But it might be hard for a B2B sales startup to gain confidence from Meta’s story — the social media company has always seemed to operate in its own world. But there’s one company’s story that might be easier to relate to: E Ink.

For those unfamiliar, E Ink was founded in an MIT lab in 1997 and is the company that invented electronic paper, the tech widely used for displays in e-book readers like the Kindle, digital signage, smartwatches and electronic labels.

E Ink’s co-founder Russ Wilcox, currently a partner at Pillar VC, recently hopped on TechCrunch’s Found podcast to talk about building E Ink and how he became a VC years later. One facet of the story that seemed particularly relevant today was how E Ink navigated its way to an exit through multiple down rounds.

Wilcox talked about how the startup made common missteps along the way — many of which current founders will likely relate to — such as trying to commercialize too soon, having to pivot away from a strategy that wasn’t working and mismanaging inventory.

“Yeah, we had three down rounds in a row,” he said. “As you can just imagine, the board discussions over the course of three or four years were getting very tough. But we wouldn’t be here if we hadn’t done that.” Wilcox said the founding team and the company’s investors were confident in the tech and the eventual outcome for the startup, which let them keep working toward an exit.

He advocates a different perspective toward down rounds, one that sees the glass half-full: It’s not a negative; it’s a sign of confidence that investors think your company will still make it. “I think a down round shouldn’t be seen as a badge of ‘oh, you failed.’ It’s actually good news,” he said. “You’re being given a ticket to try again.”

Wilcox said that E Ink raised $150 million in venture capital, but in the end was acquired by Amazon, which paid $480 million for it despite E Ink being valued at only $40 million at the time. While those numbers aren’t eye-popping, Wilcox said many of his investors ended up making 10 times what they put in and were thrilled despite the path the company took to get there. He added that E Ink today has an estimated $6 billion market cap.

“I was only able to [exit], because we had set an appropriate valuation,” Wilcox said. “So this is the consequence. When you set a $700 million valuation, it looks like you’re winning somehow and you’re not being diluted, but actually, you just raised the bar so high.”

This seems to be the right way to think about it. Down rounds are really more about right-sizing the valuation as opposed to slashing it. If E Ink can raise three down rounds and still produce a solid exit for its investors, any sound startup in today’s market might be able to pull it off.

More TechCrunch

Welcome back to TechCrunch Mobility — your central hub for news and insights on the future of transportation. Sign up here for free — just click TechCrunch Mobility! Is it…

Tesla lobbies for Elon and Kia taps into the GenAI hype

Crowdaa is an app that allows non-developers to easily create and release apps on the mobile store. 

App developer Crowdaa raises €1.2M and plans a US expansion

Back in 2019, Canva, the wildly successful design tool, introduced what the company was calling an enterprise product, but in reality it was more geared towards teams than fulfilling true…

Canva launches a proper enterprise product — and they mean it this time

TechCrunch Disrupt 2024 isn’t just an event for innovation; it’s a platform where your voice matters. With the Disrupt 2024 Audience Choice Program, you have the power to shape the…

2 days left to vote for Disrupt Audience Choice

The United States Department of Justice and 30 state attorneys general filed a lawsuit against Live Nation Entertainment, the parent company of Ticketmaster, for alleged monopolistic practices. Live Nation and…

Ticketmaster is at the heart of a US antitrust lawsuit against parent company Live Nation

The U.K. will shortly get its own rulebook for Big Tech, after peers in the House of Lords agreed Thursday afternoon to pass the Digital Markets, Competition and Consumer bill…

‘Pro-competition’ rules for Big Tech make it through UK’s pre-election wash-up

Spotify’s addition of its AI DJ feature, which introduces personalized song selections to users, was the company’s first step into an AI future. Now, Spotify is developing an alternative version…

Spotify experiments with an AI DJ that speaks Spanish

Call Arc can help answer immediate and small questions, according to the company. 

Arc Search’s new Call Arc feature lets you ask questions by ‘making a phone call’

After multiple delays, Apple and the Paris area transportation authority rolled out support for Paris transit passes in Apple Wallet. It means that people can now use their iPhone or…

Paris transit passes now available in iPhone’s Wallet app

Redwood Materials, the battery recycling startup founded by former Tesla co-founder JB Straubel, will be recycling production scrap for batteries going into General Motors electric vehicles.  The company announced Thursday…

Redwood Materials is partnering with Ultium Cells to recycle GM’s EV battery scrap

A new startup called Auggie is aiming to give parents a single platform where they can shop for products and connect with each other. The company’s new app, which launched…

Auggie’s new app helps parents find community and shop

Andrej Safundzic, Alan Flores Lopez and Leo Mehr met in a class at Stanford focusing on ethics, public policy and technological change. Safundzic — speaking to TechCrunch — says that…

Lumos helps companies manage their employees’ identities — and access

Remark trains AI models on human product experts to create personas that can answer questions with the same style of their human counterparts.

Remark puts thousands of human product experts into AI form

ZeroPoint claims to have solved compression problems with hyper-fast, low-level memory compression that requires no real changes to the rest of the computing system.

ZeroPoint’s nanosecond-scale memory compression could tame power-hungry AI infrastructure

In 2021, Roi Ravhon, Asaf Liveanu and Yizhar Gilboa came together to found Finout, an enterprise-focused toolset to help manage and optimize cloud costs. (We covered the company’s launch out…

Finout lands cash to grow its cloud spend management platform

On the heels of raising $102 million earlier this year, Bugcrowd is making good on its promise to use some of that funding to make acquisitions to strengthen its security…

Bugcrowd, the crowdsourced white-hat hacker platform, acquires Informer to ramp up its security chops

Google is preparing to build what will be the first subsea fiber-optic cable connecting the continents of Africa and Australia. The news comes as the major cloud hyperscalers battle it…

Google to build first subsea fiber-optic cable connecting Africa with Australia

The Kia EV3 — the new all-electric compact SUV revealed Thursday — illustrates a growing appetite among global automakers to bring generative AI into their vehicles.  The automaker said the…

The new Kia EV3 will have an AI assistant with ChatGPT DNA

Bing, Microsoft’s search engine, was working improperly for several hours on Thursday in Europe. At first, we noticed it wasn’t possible to perform a web search at all. Now it…

Bing’s API was down, taking Microsoft Copilot, DuckDuckGo and ChatGPT’s web search feature down too

If you thought autonomous driving was just for cars, think again. The “autonomous navigation” market — where ships steer themselves guided by AI, resulting in fuel and time savings —…

Autonomous shipping startup Orca AI tops up with $23M led by OCV Partners and MizMaa Ventures

The best known mycoprotein is probably Quorn, a meat substitute that’s fast approaching its 40th birthday. But Finnish biotech startup Enifer is cooking up something even older: Its proprietary single-cell…

Meet the Finnish biotech startup bringing a long-lost mycoprotein to your plate

Silo, a Bay Area food supply chain startup, has hit a rough patch. TechCrunch has learned that the company on Tuesday laid off roughly 30% of its staff, or north…

Food supply chain software maker Silo lays off ~30% of staff amid M&A discussions

Featured Article

Meta’s new AI council is composed entirely of white men

Meanwhile, women and people of color are disproportionately impacted by irresponsible AI.

20 hours ago
Meta’s new AI council is composed entirely of white men

If you’ve ever wanted to apply to Y Combinator, here’s some inside scoop on how the iconic accelerator goes about choosing companies.

Garry Tan has revealed his ‘secret sauce’ for getting into Y Combinator

Indian ride-hailing startup BluSmart has started operating in Dubai, TechCrunch has exclusively learned and confirmed with its executive. The move to Dubai, which has been rumored for months, could help…

India’s BluSmart is testing its ride-hailing service in Dubai

Under the envisioned framework, both candidate and issue ads would be required to include an on-air and filed disclosure that AI-generated content was used.

FCC proposes all AI-generated content in political ads must be disclosed

Want to make a founder’s day, week, month, and possibly career? Refer them to Startup Battlefield 200 at Disrupt 2024! Applications close June 10 at 11:59 p.m. PT. TechCrunch’s Startup…

Refer a founder to Startup Battlefield 200 at Disrupt 2024

Social networking startup and X competitor Bluesky is officially launching DMs (direct messages), the company announced on Wednesday. Later, Bluesky plans to “fully support end-to-end encrypted messaging down the line,”…

Bluesky now has DMs

The perception in Silicon Valley is that every investor would love to be in business with Peter Thiel. But the venture capital fundraising environment has become so difficult that even…

Peter Thiel-founded Valar Ventures raised a $300 million fund, half the size of its last one