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HomeTechDown rounds an acceptable option to extend cash runway, say founders, CEOs

Down rounds an acceptable option to extend cash runway, say founders, CEOs

At a time when venture capital funding for startups has slowed down significantly especially for richly valued companies, top founders, CEOs and investors said raising funds in a down round is a completely acceptable option for entrepreneurs if it provides them with much-needed liquidity and extends their cash runway. A down round is when a private company raises capital at a lower valuation than in its previous funding round.

During a panel discussion on ‘The Great Reset; tracking the profitability versus growth conundrum amidst the tech winter’ at The Economic Times Startup Awards 2022 held in Bengaluru on November 19, these executives said entrepreneurs should do “whatever it takes” to save their firms, including layoffs, slashing marketing budgets, and other measures that would cut costs.

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“Let us say somebody does a down round of 33%, (and) they do it in June of next year. If you look at the CAGR (compound annual growth rate) of their valuation it will still be 60%, a five-year average of their valuation growth it will be 60%… just to let you know Flipkart’s CAGR of valuation is 20-25% even today,” said Kalyan Krishnamurthy, CEO, Flipkart group, while explaining whether he was anticipating such situations for startups in the coming months. “It is perfectly fine to embrace the concept of a down round.”
In fact, Krishnamurthy said he was one of the architects of a similar event at Flipkart in 2016-17, when the ecommerce firm raised new funding at a 30% lower valuation compared to its previous financing round “We reset the whole cap table and we grew from there so it is not a problem,” said Krishnamurthy, who has previously worked at eBay and Tiger Global.

Harsh Jain, cofounder and CEO of Dream Sports, which runs online fantasy gaming platform Dream11, said he would take every hard decision right to the bone, without worrying about the optics of it. Jain said he would be in panic if he only had six months of runway left for his startup. “Our job is to make money for the business – to earn the right to continue working on a passion. We just want to do what we are passionate about and if that means mass layoffs, whatever it takes, that is your job, your fiduciary responsibility to your board, your investors, and your employees, who are hopefully your shareholders,” Jain said.

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Nithin Kamath, founder and CEO, Zerodha, which won in The ET Startup Awards Bootstrap Champ category in 2016 and in the coveted Startup of the Year category in 2020, echoed Jain’s view. According to him, when a founder is pushed to the edge, he or she will do whatever it takes. “I think entrepreneurs have to do what is right for the business and if it means convertible rounds, so be it,” he said.

Earlier, Flipkart’s Krishnamurthy had said companies were using “creative” ways of funding such as convertible notes to protect their valuations. “There is some more creativity in the funding market. You see all of us have been in this market for several years and in my previous career (at Tiger Global) or in the last 15 years this structure was kind of not very common – the convertible structure where you actually can raise money without pricing rounds,” Krishnamurthy had said.

ET reported last month that late-stage startups like Udaan were raising capital through convertible notes as big-ticket deals were taking longer to close and investors were being cautious.

Data from Venture Intelligence showed startups saw funding of $2.7 billion in the September quarter as against close to $12 billion in the same period last year. There were only four $100 million-plus deals in the September quarter, compared to 17 in the June quarter and 30 in the March quarter.

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