How best to avoid Down Rounds

In the latest instalment of our practical guides we take a look at how to avoid “Down Rounds”, something very often overlooked even though it can be of critical importance to your business to be prescient of. 

It is actually quite a prevalent issue, according to recent data provided by Pitchbook, start-up down rounds are at a 10-year high, perhaps driven by the previously heady times of post-COVID investment where we saw a number of over-inflated valuations being put on businesses. As of 2025, 15.9% of deals have involved down rounds. Additionally, most IPO listings are occurring below their peak valuations, especially among AI start-ups.

While high valuations can signal success for Founders, they also come with significant risk. Now, we don’t want to paint a pessimistic picture here, we just want to create a greater awareness around this subject as we feel there is a slight lack of understanding from what we have seen in the market of late. Remember, a gambler will always tell you about their wins, but never their losses.

This isn’t just a start-up matter, this is a general market matter to consider as even established companies are feeling the effects. For example, self-driving vehicle start-up Nuro raised $203m at a $6bn valuation. While this seems like a significant amount, it's worth noting that their previous round in 2021 was reported by Reuters at an $8.6bn valuation.

For absolute clarity, let us first break down how ‘down-rounds’ can work:

The business has a “normal” investment round:  

Investors buy 10 million shares at £10/share, resulting in a £100m valuation.

However, the next round is rather more complex as they haven’t been able to achieve a similar share value:  

• New investors buy 20 million shares at £6/share

• They invest £120M

• New post-money valuation = £220M (the £100M prior value + £120M new cash)

What happens in this scenario? Nominally, the enterprise value of the company has increased, but:

• The ownership percentage of previous shareholders shrinks, which may cause misunderstandings among previous investors.

• Previous investors could receive adjustments based on anti-dilution terms.

• Founders’ stakes could fall significantly.

Despite market conditions, company growth, or investor protections, it can happen that companies were overvalued in previous rounds, as data from 2025 suggests.

How do investors generally look at it?

It sounds like a Down Round is something bad for founders and could be seen as a red flag for investors. But that's not always true. Yes, a Down Round indicates a slowdown in company growth, but from another perspective, some investors might see it as an opportunity to invest at a discount in a promising start-up during hard times. We cannot shy away from the fact that it can sometimes be deal-breaking though, therefore it is important to always be prudent to core business activity and always ensure that you critically assess any valuation independently to validate its findings - this is the kind of acumen that will stand you in better ground.

Guide notes for Founders:

1. Don’t chase high valuations too early: A smaller, more realistic valuation is easier to defend later on. You can consult with an independent valuation unit to have realistic numbers before talking to investors. Even just doing your own research is important to try and add a layer of validation to what you’re offering. Remember, your business is only worth what someone is willing to pay, a £10m pre-rev valuation might sound incredible but if you’re then sat there with no investment you will need to adjust this.  Chase a fair value for your business and stand by it. 

2. Raise enough money for 18–24 months: This gives you time to achieve milestones before needing the next round. Funding rounds are hard and take a lot of time, with only 1 in 10 being successful (this can vary depending on the round), and so you want to ensure you provide yourself with enough runway between rounds where you require it. 

3. Show business fundamentals: Focus on revenue, retention, and unit economics. Even if you are an early-stage show, numbers, waitlist, interest of the clients, and pre-paid customers are the core for your valuation. This can be a critical differentiating factor in the times we’re in currently, it shows investors that you’re serious and not just chasing rounds in the hope that they will solve all your problems.

4. Be transparent with investors: Honest updates build trust and reduce surprise deals. If you build trust, it increases the opportunity of investing in the following rounds, which decreases the amount of struggle for the future raise. 

5. Work with supportive investors: Choose the right investors in the first instance; not all money is the same. It’s crucial to negotiate terms that will work for you in the coming years, not just in the short term. Having investors that will work alongside you in partnership 

6. Use bridge funding if needed: A short extension round can help you avoid raising large sums at unfavorable terms. Instruments like SAFEs are excellent tools for this, something not often used in the UK as it is in the US, and should be looked at with serious consideration where appropriate. 

7. Stay capital efficient: Spend wisely to defend your valuation and appeal to future investors. Pragmatism can rule the day in tougher times, showing that you can be prudent to this is attractive. 

If you cannot avoid a Down Round, you can't just hide it. You should take ownership of the situation: you need to explain first to your core employees why it happened and keep your team motivated and aligned as a senior management team - keeping the same level of communication with current investors too. Treat it as a reset option and remember that even big, successful companies had down rounds. 

In summary: 

With the market now correcting itself following a few heady years of inflated valuations*, which it needed to do, many start-ups are discovering how hard it is to raise capital at peak prices.

Finally, while high valuations may bring short-term reputation, without strong fundamentals, they can turn into a liability in the next round. For Founders, the message is simple: sustainable growth and realistic metrics matter more than chasing headlines. And if a Down Round becomes unavoidable, it should be seen as a critical reset on the path to building again and one that should be tackled head-on. 

For more information on what this could mean to you please contact at info@barntonparkgroup.com 

*This isn’t to say that all valuations were inflated during this period, just to state that a new balance is being sought.