Devaluation flywheel: Why funding rounds can decrease your valuation (if you plan them too late)

New funds bring responsibility. 'Money needs to flow', and steps essential for growth (such as hiring, marketing campaigns or international expansion) immediately drain your cash. Without clear and proactive financial planning, you risk making decisions that are later overtaken by reality. That's exactly where the devaluation flywheel can emerge: a downward spiral where a higher burn rate, a shorter runway and forced fundraising ultimately lead to valuation loss and dilution.

In this blog, you'll discover how this mechanism works, what early warning signs you can spot, and how a lean but consistent finance approach helps break the spiral.

The context: runway is finite

Start-ups and scale-ups often raise capital for growth when momentum arises. This is typically for a runway of 12–18 months. In that period, they go all-in on expansion and development (of the team, product or commercial strategy) and at the end of that period, they must either raise funds again or achieve cashflow positivity.

In this phase, we often see financial management limited to accounting reporting: correct and compliant, but mostly retrospective. Figures arrive late, and rarely in a format that helps make targeted choices or steer cash drivers. That's where the risk lies, because cash is king. You can make a profit and still run out of money if working capital is tied up, for example due to delayed payments, late invoicing, inventory build-up or growth investments that only pay off later.

Devaluation flywheel: the red flags

It often starts with a combination of optimistic revenue plans and investments that run ahead of them, such as hiring, marketing or international steps. On paper, it still looks comfortable, because the forecast includes those optimistic sales. The forecast might still feel solid because no one explicitly names the cash impact of decisions or challenges the sales forecast for the coming months.

As a result, the burn rate is higher than expected and the runway shrinks faster. Without a rolling cash flow forecast, you only spot this late. Especially if reporting is only monthly and retrospective, and not broken down by product/service, segment or margin. Red flag: discussions about hires or expansion happen without thresholds or scenarios on the table.

Once a doom scenario looms (for example, the organisation running dry in a few months) you have to raise money fast. Fundraising under time pressure increases the risk of a downround: investors see the pressure and offer a lower valuation. Founders have to give up more shares for the same amount. Less room to manoeuvre today makes it harder to hit your roadmap tomorrow, and that's how you end up in a potential 'devaluation flywheel'.

How Should It Be Done? The Green Flags

You don't necessarily need to set up a heavy programme before seeking extra capital, but if you want to succeed, the following are indispensable in our view:

1) Management reporting that provides direction

Ensure management reporting is fast, clear and directly usable for decision-making. Track revenue and costs at the right level of detail, for example per service, product line or customer segment, rather than just one overall picture. This way, you not only see what is happening, but also where your margin comes from and which factors really drive your costs (such as non-billability in services, for instance). Use reporting not to explain afterwards why something went wrong, but to steer early enough.

2) Rolling forward-looking forecast

Don't work with a static budget, but with a rolling forecast for revenue, costs and especially cash. It's not about perfectly predicting the future, but about spotting the aforementioned red flags before it's too late.

3) Scenarios that you actually use

Create different scenarios: a base case, a worst case and a best case. Also define in advance which actions go with each scenario, for example an extra hire once you've hit a certain revenue level or built up sufficient pipeline. Test major strategic choices against your worst case: can internationalisation proceed without cash getting too tight, or is it wiser to postpone that step to Q3? Define clear thresholds that turn investments 'on' or 'off', such as a minimum bank balance or a certain ratio, and keep operational interventions in reserve to safeguard cash curves, like advances or tighter payment terms.

4) Start fundraising in time

Don't start too late. Begin conversations when you still have sufficient runway. Time strengthens your negotiating position: you can have discussions calmly, compare multiple options and negotiate better terms. This protects your valuation and means you give away fewer shares for the same amount.

In a nutshell

A devaluation flywheel is a negative spiral that's easy to fall into but hard to escape. So start financial planning early. It doesn't have to be with a heavy programme. A lightweight setup with clear management reports, a rolling forecast and three scenarios is often enough to spot early where you should adjust. Define in advance which choices you make per scenario and start any new fundraising while you still have breathing room. Because time is negotiating power. This way, capital increases your firepower instead of diluting your position.

The goal is simple: raising money should boost your firepower, not dilute it.

Fancy brainstorming a lightweight setup without extra baggage? We'd love to! Get in touch.