In many ways, there has never been a better time to be a venture capitalist. Nearly everyone in the industry is raking in money through long-awaited exits or because more capital flooding into the sector has meant more money in management fees — and sometimes both. Still, many early-stage investors are becoming wary about the pace of dealmaking. It’s not just that it’s much harder to write checks at what feels like a sound clip or that most VCs can no longer afford to be price sensitive. Many of the founders with whom they work are handed follow-
on checks before figuring out how best to deploy their last round of funding. According to the data company CB Insights, from 2016 through 2019, an average of 35 deals a month featured bands of $100 million or more. This year, that number is closer to 130 of these monthly sega-rounds. The foam is hardly contained to maturing companies. According to CB Insights’s data, the median U.S. Series A valuation hit $42 million in the second quarter, driven partly by crossover investors like Tiger Global, which closed 1.26 deals per business
day in Q2. (Andreessen Horowitz wasn’t far behind.) It makes for some bewildering times, including for longtime investor Jeff Clavier, the founder of the early-stage venture firm Uncork Capital. Like many of his peers, Clavier is benefiting from the booming market. Among Uncork’s portfolio companies, for example, is LaunchDarkly, awhichhelps software developers avoid missteps. Last month, the seven-year-old company announced $200 million in Series D funding at a $3 billion valuation. That’s triple the valuation it was assigned early last year.
It’s a fantastic company, so I’m very excited for them,” says Clavier.
At the same time, he adds, “You have to put this money to work brilliantly.
That’s not so easy in this market, where founders are inundated with interest and, in some cases, are talking term sheets after the first Zoom with an investor. (“The most absurd thing we’ve heard is funds that are making decisions after a 30-minute call with the founder,” says TX Zhou, the cofounder of L.A.-based seed-stage firm Fika Ventures, which just tripled. The number of assets it’s managing.)
More money can mean a much longer lifeline for a company. But as many investors have learned the hard way, it can also distract and hide fundamental issues with a business until it’s too late to address them.
Taking on more money also frequently goes hand-in-hand with a more extensive valuation, and lofty valuations come with their positives and negatives. On the plus side, big numbers can attract more attention to a company from the press, customers, and potential new hires. At the same time, “The more money you raise, the higher the valuation it is; it catches up with you on the next round because you got to clear that watermark,” says Renata Quintini of the venture firm Renegade Partners, which focuses mainly on Series B-stage companies.
Again, trying to slow down isn’t always possible in today’s market. Quintini says that some founders her firm has talked with have told they wont raise any more, explaining that they cannot go faster or deploy more than their business model ialready supports. For others, she continues, “You’ve got to look at what’s happening around you, and sometimes if your competitors are raising and they’re going to have a bigger war chest and [they’re] pushing the market forward and maybe they can out-hire you, or they can outspend you in certain areas where they can generate more traction than you,” that next check, often at the higher valuation, begins to look like the only path to survival.
