Dear SaaStr: We’re Going to Need to Do a Downround at a Lower Valuation. How Do We Handle It?
This is a tough spot, but it’s not the end of the world. Plenty of great companies have faced this exact challenge and come out stronger. Public stock prices go up and down. It happens to start-ups too, it’s just you don’t usually see it happen because priced rounds only happen infrequently.
The key is to focus on resetting expectations, managing your team and investors, and positioning yourself for long-term success. Here’s how I’d approach it:
1. Reset Expectations with Your Team
– **Be Transparent**: Your team likely knows the company isn’t hitting the valuation targets you set in the last round. Be upfront about where you are and what you’re doing to fix it. Transparency builds trust.
– **Focus on the Long Game**: Remind your team that valuations are just snapshots in time. What matters is building a great business that compounds over the long term. If you’re growing, even at a slower pace, you can still create a meaningful outcome.
2. Reset Expectations with Your Investors
– **Have Honest Conversations**: Your existing investors are your partners. If you’re in a tough spot, talk to them about it. They’ve likely seen this before and can help you navigate it. They’ll get it, if they are pros. In fact, they’ll likely be relieved you’re being proactive here.
– **Ask for Support**: If you need more runway, ask your investors to participate in an internal round. They may not be thrilled, but many will step up to protect their investment. Just be realistic about how much they’ll commit—it’s often enough to keep you alive, not to thrive.
More on that here:
3. Manage Your Cap Table
– **Avoid Over-Dilution — At Least as Much as Practical**: If you’re raising a down round, be careful about how much equity you’re giving up. You don’t want to end up with so little ownership that you lose motivation—or control.
– **Reprice or Remix Options**: If your valuation has dropped significantly, your employees’ stock options may be underwater. Consider repricing them or issuing new grants to keep your team incentivized. You may be surprised how much additional grants at a lower strike price motivate the best on your team.
4. Focus on Efficient Growth
– **Hit the Rule of 40**: If you’re not growing as fast as you’d like, focus on improving your margins. Companies that achieve the Rule of 40 (growth rate + profit margin = 40% or more) tend to hold their value better, even in tough markets.
– **Double Down on Retention**: Net Revenue Retention (NRR) is a superpower. If you can show that your existing customers are sticking around and spending more, it’s a strong signal to investors—even if your new logo growth has slowed.
5. At Least Think About Positioning for a Strategic Exit
– **Be Realistic About Outcomes**: If you’re not on track to grow into your last valuation, start thinking about potential acquirers. Position yourself as a strategic asset that can help a larger company solve a specific problem.
– **Leverage Your Investors**: Your investors likely have relationships with potential acquirers. Don’t be afraid to ask for introductions.
6. Learn from the Experience
– **Don’t Over-Optimize for Valuation**: One of the biggest mistakes founders make is raising at a valuation they can’t grow into. It feels great in the moment, but it creates enormous pressure to hit unrealistic milestones. Next time, raise at a valuation that aligns with your actual growth trajectory.
– **Focus on Fundamentals**: Valuations come and go, but a great business is forever. If you’re building something with strong unit economics, happy customers, and a clear path to profitability, you’ll eventually find your way back.
Final Thoughts
The reality is a valuation is just a moment in time.
A down round isn’t fun, but it’s also not uncommon. Many companies face the same challenges. The good news is that if you focus on efficient growth, manage your cap table wisely, and keep your team motivated, you can still create a great outcome. And remember, even if you’re not a unicorn, any exit where your investors and team make money is still a win. Maybe not an epic win, but a real win.
