‘Down’ Rounds And Investor Caution — Blip Or Trend?

The stock market swings can be confusing.  

Public (retail) investors have been, generally speaking, bidding up shares, seemingly shrugging off the lingering impacts of economic headwinds and the pandemic.

A series of anecdotes do not necessarily make a trend. Recent down rounds may spotlight the particular headwinds of the pandemic — and challenges facing companies that promise to be tech “disruptors” in particular. And the series of “down rounds” seem to imply there is a growing disconnect between public and private market valuations.

In terms of definition, a down round is when a private company taps the private market for fundraising, generally selling equity for lower valuations than had been seen before. That can be seen as a sign of caution, of private investors looking to part with funds only if, as the saying goes, they get more for their money.

Bloomberg reported this week that Traveloka, the online travel startup that serves Southeast Asia, is on the cusp of raising private-market funds at a private market valuation of about $2.8 billion. That’s about 17 percent less than previous rounds. The firm, of course, operates within the travel industry, which has been hammered throughout the entire ecosystem. Traveloka backers such as Expedia have seen bookings slide by more than a third. 

“Down rounds” have not been isolated to Traveloka or to the travel industry. They may not even be all that long-lived. 

To get a sense of how a rebound can happen — and quickly: Last month, insurTech firm Lemonade filed documents with the Securities and Exchange Commission that sought to raise $270 million, with a per share range of $23 to $26. NASDAQ.com noted that at the midpoint of that range, the implied valuation was about $1.4 billion, which was roughly 42 percent lower than previous rounds. And then, of course, Lemonade went public, just this month, and put up huge gains, closing up about 140 percent on its first day of trading, and changing hands, intraday, at a recent $80 a share and sporting a market cap of roughly $4.5 billion.

Also last month, Monzo, the challenger bank based in the U.K., closed a funding valuation that is 40 percent lower than its valuation last year, PYMNTS noted. The company closed the equivalent of $75 million dollars, in turn valuing the company at $1.5 billion, down from last year’s reported $2.5 billion valuation.

As reported, Monzo’s installed base of 4 million users has taken shape even as the company has lacked profitability, losing more than $57 million in the trailing 12 months that ended in February 2020. Monzo also has been trying to expand across borders (notably in the U.S.), and where travelers could spend with their Monzo cards globally (without fees added to FX rates), at say, restaurants. Of course, in the midst of the pandemic, travel and traditional (brick-and-mortar) commerce have been largely hamstrung.   

Each of these companies carries the banner of looking to “disrupt” their chosen verticals — respectively, travel, insurance and banking — in a digital-first manner. Among the chief hallmarks of fast-growing startups are losses. Traveloka has its bumps within travel; Lemonade lost more than $108 million in 2019, which was double the 2018 losses, even as revenues soared from about $21 million to nearly $64 million over the same period. In any event, Lemonade’s roaring performance out of the gate implies that, even if private markets had been concerned, IPO investors are decidedly more sanguine. 

Down rounds carry with them some negative connotations — or, more bluntly, investor concerns. Perhaps investors are worried about slowing growth, or profits. There’s a negative ripple effect, too, in that previous investors (who bought in “higher”) see the value of their holdings (and ownership) decline, at least a bit. Perception, as they say, is reality. And even in this market, at least sometimes, perception can become cautious — and time will tell if this is blip or trend.