Up Round - Explained
What is an Up Round?
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Table of ContentsWhat is an Up Round?What are the Characteristics of an Up Round?Academic Research on Up-round
What is an Up Round?
In every venture capital investment, round describes a type of funding used for the investment. A venture round describes a round of financing which is peculiar to every business. Some businesses or companies require more than a round of financing especially when they are in need of additional capital.
The outcome of additional financial round that company engages in determines whether there will be upround or down round financing. Up Round is a type of financing whereby a company increase in worth when compared to its previous valuation. This occurs when investors buy stock form the company as a higher rate or valuation from the previous rate.
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What are the Characteristics of an Up Round?
Usually, there is a difference between the valuation of initial or first round financing and additional rounds of financing. That is the valuation of a previous round of financing is often different forms the newly added round. The difference, whether an increase or decrease determines whether the firm will experience up round or down round financing. Many companies find setting a good paperwork for financing round as a daunting task, hence they demand the service of a professional, usually a corporate lawyer.
The overwhelming demand of organizing venture capital financial rounds can be done with through a network of expert corporate lawyers. The need for additional capital cause many companies do additional rounds of financing which are effective ways of generating venture capital. When an additional round of financing occur, the amount venture capital realized determines whether the round is up round or down round.
When a company is able to raise higher capital from a financial round, it is called up round but inability to raise higher capital than those of previous financings, it is down round financing. Up rounds indicate increase in a company's wealth while down rounds reduce the position of a company on wealth ranking or equity position. Both up rounds and down rounds are ways of raising venture capital that have significant impacts on the company and their investors.
While up rounds have high profit tendencies for investors, down rounds are seen to be harsh and bad news for many investors. Up rounds give companies a positive edge over others in terms of equity position while down rounds reduce the company's valuation as many investors often ask for additional assurances in these cases. Also, up rounds boosts the confidence of investors and the company while down rounds are associated with reduced confidence.
Down rounds reduce the morale of both investors and employees because it make rebound and growth of the company difficult to attain. Down rounds occur when a private company offer additional shares for sale at a price lower than that of an earlier financing. Startups have been studied to have a high rate of down rounds financing, over-valuation is also noticeable in startups, especially startups in the tech industry.
Many startups engage intensive publicity and extravagant promotion which help them realize massive first-round valuations, which will in turn cause over-valuations. In most cases, after over-valuations might have occurred as a result of hype in startups, the next round is often a down round. Although, many companies avoid down round, it might be the key to the success of some businesses, especially startups.
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