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Why Down Rounds are Becoming More Common for Fintech Startups

As the market shifts dramatically in 2022, many startups, including fintech companies, are turning to down rounds as a way to raise capital.

Down rounds are rounds of funding that occur at a lower valuation than previous funding rounds.

Below, we will look at two recent examples of fintech companies, Varo and Stripe, that have turned to down rounds to raise capital.

Varo’s Struggle to Raise Capital

Last week, it was reported that Varo, a struggling neobank, was raising a $50 million equity round led by Warburg Pincus at a “significantly” lower valuation. According to Fintech Business Weekly, Varo would be raising the funding at a pre-money valuation of $1.8 billion, down from the $2.5 billion it was valued at in September of 2021 when it raised a massive and “oversubscribed” $510 million Series E.

Varo celebrated the two-year anniversary of obtaining its national bank charter last August, making it the first-ever all-digital nationally chartered U.S. consumer bank. However, the company’s recent funding struggles indicate that it may be experiencing challenges with customer acquisition and profitability.

Stripe’s Quest for Capital

Another fintech giant, Stripe, is also reportedly seeking a down round to raise capital. The Information reported that Stripe is still trying to raise capital and is now believed to be targeting a valuation of around $50 billion, or $20 per share, after hitting some obstacles. Earlier this year, Thrive Capital was said to have committed $1 billion in fresh capital to Stripe as part of a new investment in the works that would have valued the fintech company at between $55 billion and $60 billion.

Initially, it was thought that Stripe was seeking to raise $2 billion, but the number is now believed to actually be closer to $2.5 billion to $3 billion. According to reports from The New York Times and The Information, Stripe is raising new funds to “address the issue of expiring restricted stock units for some of its veteran employees — and a massive employee tax bill that will likely come with it.”

Stripe has also been impacted by the global downturn, laying off 14% of its staff, or around 1,120 people, in November of 2021. The company had already slashed its internal valuation more than once over the past year, with an 11% cut in its internal valuation to $63 billion occurring earlier this year.

The Unusual Move of Raising Funds for a Tax Bill

The fact that Stripe is raising funds to pay off a tax bill raised eyebrows among investors. Ken Smythe, founder and CEO of Next Round Capital Partners, a capital markets and VC secondaries firm, called the move “highly unusual for investors to be excited about a new round that is primarily going to pay unpaid taxes.”

However, in the current market climate, raising a down round may be seen as a better alternative than shutting down completely. When faced with the difficult decision of either raising a down round or closing down, most startups would opt for the former.

The Bottom Line

The current market conditions have led to down rounds becoming more common for fintech startups in 2022. Companies like Varo and Stripe have both turned to down rounds to raise capital, highlighting the challenges they face in a volatile market.

While the move to raise funds for a tax bill may seem unusual, it may be a necessary step for Stripe to retain and motivate its veteran employees. As the market continues to shift, it remains to be seen how many more fintech startups will turn to down rounds to raise the necessary capital to survive.

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