ETtech Explainer: What are down rounds and will they become the norm for Indian startups?

economictimes.indiatimes.com:

PharmEasy is planning to raise around Rs 2,400 crore ($291.5 million) through a rights issue, at a 90% discount to its peak stock price, to repay a loan from Goldman Sachs. The Mumbai-based epharmacy, which also owns diagnostics firm Thyrocare, is expected to be valued at $500-600 million — down from the high of $5.6 billion two years ago.

If the rights issue goes through at the proposed pricing, it would be among the first major down rounds for a large internet firm in a fresh fundraise. ETtech answers some questions about down rounds and their increasing relevance in India’s startup ecosystem.Also read | System of a down round: valuation markdowns hit Indian startups; to affect fundraising, IPO plansWhat are down rounds and why are they carried out? A down round is when a privately held firm raises funds at a valuation lower than that ascribed to it in the previous round.

There have been instances of down rounds in the US and European markets over the past year. However, while crossover funds and public market investors have been marking down the value of their shareholdings in Indian tech startups, a down round via a new fundraise, such as the one proposed by PharmEasy, is yet to hit the domestic startup ecosystem.

Down rounds come into play when fundraising becomes difficult for privately held companies and a liquidity crunch casts a shadow over their available runway. Like convertible notes, down rounds are another means of fundraising amid the ongoing funding winter.Why is PharmEasy planning a rights issue at a 90% discount? The rights issue at a massive 90% discount comes after PharmEasy breached its loan covenant terms with Goldman Sachs.