Massive Early-Stage Funding — I Was Wrong.

“Every A-round is $10M nowadays. That’s the new norm. There is too much money in the market.”

I think I carelessly quipped something along these lines in the past three weeks. And I was wrong. I had fallen into the average-bias of VC-world, into false signaling of few outliers. As I wrote earlier (and so I should know better!) averages and medians are a dangerous thing in venture capital.

The Perception

The (free) daily newsletter StrictlyVC, neatly curated by the wonderful Connie Loizos, recently changed their format: They now segment new funding rounds into “Massive Fundings”, “Big-But-Not-Crazy-Big Fundings”, and “Smaller Fundings”. I noticed how that drove my attention to the larger fundings, not the smaller ones — and I put perhaps more than reasonable emphasize on large fundings of young startups:

example of StrictlyVC daily newsletter: Massive Funding of young companies
Example of the new VCInsights free daily newsletter format

PitchBook and the National Venture Capital Association (NVCA) publish quarterly reports on the state of the Venture Capital ecosystem. Their recent H1 2019 report highlights growing early-stage VC valuations and growing early-stage VC deal sizes:

Early-stage valuations reach new highs in 2019 (Source: PitchBook-NVCA Venture Monitor, as of June 30, 2019)
Deal sizes continue to climb in 1H 2019 (Source: PitchBook-NVCA Venture Monitor, as of June 30, 2019)

The Reality

Both StrictlyVC and the PitchBook-NVCA Venture Monitor cover a broad range of sectors. I only invest in Information Technology (networks and communications, computer hardware, semiconductor, software, etc.). Last week I wrote about the steady decline in new IT startups with a headquarter in the US for the past five years. I then went one step further and looked at startups by founding year with more than $10M in total funding, and specifically more than $10M in total funding after completing their A-round:

New IT Startups Founded with HQ in the U.S. and their early-stage funding velocity (Source: Pitchbook, as of 07/30/2019)
New IT Startups Founded with HQ in the U.S. and their early-stage funding velocity (Source: Pitchbook, as of 07/30/2019)

Here is the same graph in percentages:

New IT Startups Founded with HQ in the U.S. and their early-stage funding velocity (Source: Pitchbook, as of 07/30/2019)
New IT Startups Founded with HQ in the U.S. and their early-stage funding velocity (Source: Pitchbook, as of 07/30/2019)

It is intuitive that startups founded earlier had more time to raise more than $10M total (the mid-blue middle section). And 2017 to 2019 might be too young to tell (the right-most stacked bars). Maybe some startups founded in 2016 did not come back to the market yet for their Series A (and are in the lowest light section). But it is clear that the percentage of young startups raising more than $10M at an early stage (Series A and earlier) is definitely not growing. While not necessarily statistically significant, the percentage is actually declining.

So actually less early-stage startups are raising large amounts, by percentage as well as in absolute numbers.

I could have seen the bifurcation from the PitchBook-NVCA Venture Report, who kindly provided 75th percentiles, medians, and 25th percentiles. My perception was definitely that everyone is raising massive rounds these days. Which is not true. It’s good to check a gut feeling against some data. I learned something today.

Update [September 2019]

I came across a long-form article — a 25-minute read! — at https://www.toptal.com/finance/venture-capital-consultants/state-of-venture-capital-industry-2019 with lots of additional data and sources.

The escalation of fundraising to venture capital has largely been concentrated on large “mega” or “supergiant” funds with AUM pools of over $500 million.

https://www.toptal.com/finance/venture-capital-consultants/state-of-venture-capital-industry-2019

I’ve written before about fund concentration, especially in the Bay Area. Alex is doing a nice job connecting the dots to “Supergiant VC Rounds”:

Supergiant VC Rounds 2016 – 2018: Number of VC Funding Rounds of Over $100 Million (via: https://www.toptal.com/finance/venture-capital-consultants/state-of-venture-capital-industry-2019)

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