Downrounds are on the rise as high-tech crisis deepens
In the first half of 2022, only 90% of the startups raised investments at a value higher than their previous round, compared to 96% in 2021
One of the clear signs of a high-tech crisis is a decline in the value of a company that has raised money. A company that raises at a value lower than the value at which it raised in the past has run into a real crisis, sometimes even through no fault of its own. The significance of what is known as a downround is a decrease in the holdings of all shareholders, employees, founders and investors.
In the first half of 2022, Israeli startups recorded a significant decrease in the number of rounds at an increased company value and a slight increase in the number of rounds at a decreasing value. In the first half of 2022, 90% of the fundraisings were at an increased value compared to 96% last year and 9% of the fundraisings were at a decreased value compared to 4% last year. These data come from a survey conducted by the Shibolet law firm in collaboration with the law firm Fenwick & West LLP.
The survey also shows that in the first half of 2022 there was a significant increase in early-stage recruitments and a decrease in recruitment late-stage rounds.
In view of the insecurity in the markets, companies in growth stages that are now seeking to raise funds are forced to face extremely difficult fundraising conditions such as a decrease in the value of the company and a demand from investors to protect the valuation at which they invested in.
"What you are seeing now is a first look at what is expected in the coming months. A few deals were made at the beginning of 2022, but these rounds have not yet been affected by the magnitude of the change," says attorney Lior Aviram, Managing Partner at Shibolet. "The interest rate increases in the world and the change in the trend in the technology markets have not been fully digested in the first half of 2022. I estimate that already in the next survey that will examine the second half of the year, we will see the impact and there will be a greater decrease in the value of the companies."
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According to Aviram, many of those who decide to invest are protecting the valuation at which they invested in by setting conditions. "We have been in crisis periods similar to this one and in the past we have seen a decrease of many tens of percent in the value of the companies," he says. "In our estimation, there will be a decrease in the value of companies in Israel according to what happened in Nasdaq. This will be reflected in the results of the following medians. In the short term, there will be a shift of money from investing in early stages to investing in late stages because it is relatively safe. The technology is more solid than any previous crisis, but in the meantime we will see significant value decreases."
