There has never been a better moment to be a venture capitalist. Nearly everyone working in the industry is making money. This could be due to long-awaited exits, or because there has been more capital flooding into this industry.
However, early-stage investors are growing more concerned about the speed of dealmaking. It's not that it is harder to write checks at a reasonable pace at the moment. Most VCs also feel that they cannot afford to be price sensitive. Many founders they work with are receiving follow-up checks before deciding how to best deploy their last round.
According to data company CB Insights, an average of 35 deals per month featured rounds exceeding $100 million from 2016 to 2019. These mega-rounds are closer to 130 this year. Maturing companies are not immune to the froth. CB Insights' data shows that the median U.S. Series A value was $42 million in the quarter. This is due in part to crossover investors such as Tiger Global which closed 1.26 deals per day in Q2. (Andreessen Horowitz was not far behind.
This makes it difficult for Jeff Clavier, a long-time investor and founder of Uncork Capital, to navigate the market. Clavier, like many of his peers is enjoying the boom market. LaunchDarkly is one of Uncorks portfolio businesses. It helps software developers avoid making mistakes. The seven-year-old company raised $200 million in Series D funding last month, at a valuation of $3 billion. It is now valued at three times the amount it received in early 2013.
Clavier says it is an amazing company and he is very excited for them.
He also said, "You have to put that money to work in an extremely smart way."
This is not easy in this market where investors are flooding founders with interest. In some cases, they are even discussing term sheets with investors after the first Zoom. (The most bizarre thing we've heard is funds making decisions after a 30-minute conversation with the founder. This is according to TX Zhou, cofounder of Fika Ventures in L.A., which just tripled its assets.
A company can have a longer life span if it has more money. However, investors have learned that money can be a distraction and hide important issues until it is too late.
A higher valuation often means that you will take on more money. However, these valuations have their positives and minuses. A company with a large number can draw more attention from the media, customers and potential employees. However, the more money raised, the higher its valuation, it will catch up to you on the next round because you have to clear that watermark. Renata Quintini, a venture firm Renegade Partners, focuses mainly on Series B-stage companies.
In today's market, slowing down is not always possible. Quintini states that many founders she has spoken to say they won't raise more money. They explain that their business model cannot support more funding. For others, Quintini continues: You have to look around at the world. Sometimes, if other people are raising funds, they might be able to out-hire or outspend you in areas that can generate more traffic than you. This makes the next check, which is often at a higher valuation, seem like the only way to survive.
Many VCs argue that today's valuations are justified because companies are expanding globally faster and creating new markets. In some cases this is true. Interestingly, even companies previously thought to be highly valued by private investors like Doordash and Airbnb, their valuations have soared as publicly traded companies.
Clavier agrees with other VCs that valuation can be completely detached from multiples for many companies.
This might seem like a problem investors love to solve. This depends on how long the go-go market continues to last.
Clavier claims that a company he owns that did a great Series A, and did a great Series B before its time is being preempted to make way for a Series C. The valuation is completely disconnected from what they actually do.
He said he was happy for the outfit, and I don't doubt they will catch up. This is the point: They will need to catch up.
Listen to Clavier's conversation for more details.
