It appears things are not going well for startups these days.

Down rounds, or a funding round in which a startup raises capital at a lower valuation than its last investment, have become more common than the venture community has seen in nearly half a decade. According to data from Carta, down rounds nearly quadrupled in number in Q1 2023 compared to a year earlier.

Down rounds are bad because they can lead to outsized dilution, unhappy investors, employees fretting over the value of their equity and other less than winsome events. They are new to many startups and were quite rare during the most recent venture boom, when so many startups were raising multiple up rounds in the same year that it became a mini-trend.

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It’s not shocking to see down rounds becoming more common, but it is somewhat surprising that they accounted for nearly one-fifth of all venture investments Carta saw in the first quarter. Things have gotten worse for startups much sooner than we anticipated.

Furthermore, Carta reports that a minimum of “40% of all investments in Series A and Series B companies were bridge rounds in Q1, the highest figures of the 2020s.” The same forces driving the prevalence of down rounds are at play here: Namely, the pace and value of venture capital deal-making are in retreat, and as the public markets have reset, so have valuations for startups at all stages.

Down rounds, flat rounds and more complex venture terms

When we went over Carta’s initial take of its Q1 2023 data, we found that fewer dollars were going to work at lower prices.

That might sound like an odd combination of events. After all, if startups are cheaper, why aren’t venture investors putting more capital to work? It’s because venture investment is essentially a momentum trade, in which rising prices for startup shares lead to investors being able to raise more capital, which allows them to put more money to work at even higher prices.

Yes, it is something of a self-reinforcing cycle. During periods of exuberance, if you press a VC about why they are moving so quickly and skipping nominally important techniques of intelligent investing like due diligence, they will say something about needing to play the game on the field.