As startup prices soared in the runup to last year’s Facebook IPO, entrepreneurs, investors, and tech observers sometimes griped about lofty valuations.
Just mention Foursquare, say, or LivingSocial, and they’d go off.
These are tech companies that snagged a lot of press and tens (or hundreds) of millions of dollars before solidifying their business models. Investors say they’re worth tons of money—but in the end, that’s a gamble, and the companies may actually be worth nothing.
After a few years of massive hype in the startup sector, absurd-sounding valuations are starting to correct themselves. Startups are confronting the prospect of raising "down rounds" from investors—or rounds of financing that value the companies at less than the previous round.
LivingSocial, for example, was once valued at $5.7 billion; it’s now worth a quarter of that, or less, depending on whom you ask.
But more often, down rounds happen at a far earlier stage, a result of too-lofty valuations assigned in initial financings.
What happens when companies that were once worth billions of dollars suddenly find themselves worth much, much less? And why were they ever valued that high in the first place?
