Down rounds, which occur when a company raises funding at a lower valuation than its previous funding round, are a significant trend in the private market. The data from Forge Global’s Q2 2024 Investment Outlook provides valuable insights into the prevalence and impact of down rounds in the current market environment.
According to the data, the first quarter of 2024 saw growth in overall fundraising, with companies on the Forge platform raising the most capital since Q2 2022. However, more than half of the rounds in Q1 2024 were down or flat, suggesting that capital remains expensive for companies seeking an infusion of cash. This indicates a challenging fundraising environment and highlights the prevalence of down rounds in the current market.
Further analysis of the data reveals that companies that reduced their valuation in Q1 2024 were more likely to have raised primary funding in 2021 or 2022. These companies’ last rounds were done during frothy market conditions, and their business models may have been more appealing to investors three years ago than today. Conversely, companies that grew their valuation in Q1 2024 were more likely to have raised primary funding in 2023, and their valuation gains may be influenced by the fact that they raised funds in a more restrained valuation landscape. This indicates a trend where companies that raised funds during bullish market conditions are now facing challenges in maintaining their valuations, leading to down rounds.
Additionally, the data shows that median valuation step-ups remain close to flat for companies raising primary funding. While capital is coming back to the market, step-ups have not yet shown a broader trend reversal. This suggests that even the best-performing companies are not achieving substantial valuation increases when raising primary capital compared to previous years. This could be contributing to the prevalence of down rounds, as companies struggle to achieve higher valuations in the current market environment.
The data also provides insights into the emergence of new unicorns in 2024 based on funding rounds. While the Enterprise Software sector declined in Q1 2024, some prominent names on the Forge platform became unicorns in 2024 based on their latest primary fundraising and have begun trading in the secondary market. This indicates that despite challenging market conditions, certain companies are still able to achieve significant valuation increases, potentially avoiding down rounds.
In terms of the secondary market, private companies continued to trade at a wide range of premiums/discounts to primary valuations in Q1 2024. The median discount for private companies on the Forge platform was approximately 51%, consistent with the last four quarters. This indicates that there are still significant discrepancies between private and primary valuations, potentially leading to down rounds for companies seeking additional funding.
Overall, the data from Forge Global’s Q2 2024 Investment Outlook highlights the prevalence of down rounds in the current private market environment. Companies that raised funds in frothy market conditions are now facing challenges in maintaining their valuations, leading to a significant number of down or flat funding rounds. This trend has implications for both investors and companies, as down rounds can impact valuations, dilute existing shareholders, and create challenges for companies seeking additional funding.
As such, it is crucial for investors and companies to carefully assess the market dynamics and valuation trends to navigate the current environment effectively. Companies looking to raise additional capital may need to consider alternative strategies such as convertible notes, SAFE notes, or down round protection clauses to mitigate the impact of down rounds on their valuations. Similarly, investors should conduct thorough due diligence and risk assessment to evaluate the potential impact of down rounds on their investment portfolios.
In conclusion, the data from Forge Global’s Q2 2024 Investment Outlook sheds light on the prevalence and impact of down rounds in the private market. This trend underscores the importance of vigilance and strategic planning for both investors and companies operating in the current market environment. By understanding the factors contributing to down rounds and implementing proactive measures, stakeholders can navigate the challenges and capitalize on the opportunities presented in the private market.
Also published on Medium.