Heads Or Tails: Does It Make Sense To Bet On Down Rounds?

I was doing some data mining in our database of New England venture transactions (see Foley Hoag Venture Perspectives) for reasons completely unrelated to the topic I am about to address and inadvertently stumbled on this topic. Let me start by saying that we are all prisoners of our own experience. Probably there are people out there with a different experience, but in my experience down rounds happen because companies have started a downward spiral and it is just a matter of time and a certain amount of swirling before they get flushed by their investors.

It does not seem to matter what the articulated reason for the loss of valuation – market conditions, ineffective management, too early to market, too late to market, technology challenges, long adoption cycles, etc. – in each case one down round leads to another. With each successive down round the common holders (and option holders) become more and more diluted and demoralized. Key players start to leave.