Last week, the team at Wharton in San Francisco invited me to speak at the Entrepreneurs Workshop. I chose the topic of the “Five Forces Shaping the Fundraising Market” and prepared a Mary Meeker style presentation, with a chart and a bullet point on each slide, to illustrate the forces in tension. It was great fun.
I've embedded the slides from the presentation above and will link to the video once it's live. To help provide some context to charts, I've summarized the five forces below. These are the five major forces shaping the fundraising market today:
- The Fundraising Market is Stable, Despite Public Market Fluctuations. The dollars in and out of the venture market are relatively constant. LPs are investing into venture capital at a steady, and likely increasing rate. Over the last five years, dollars into the venture industry has remained at or below the 12 year median. 2014 looks to be a bit of a stronger year. VCs are investing at a relatively constant pace and at a relatively constant average dollars per investment. The public market correction in consumer and enterprise stocks in February was real and significant, deflating consumer by 25% and enterprise by 40%+. Many of those companies have rebounded some since the lows, but institutional investors have broadly cycled from growth to value stocks. Valuations may be more varied but total capital invested in startups is constant.
- Startups are Much More Capital Efficient than they Were Ten Years Ago. Startups require 50% of the capital of 12 years ago to become publicly traded companies or reach twice the revenue on the same dollars invested. Some outliers are substantially much more efficient than that. This efficiency is driven by lower cost-of-customer acquisition because of better acquisition channels and lower infrastructure costs.
- For the Most Attractive Startups, Seed Rounds Have Replaced Series As. Seed investment dollars have tripled in 4 years, driven mostly by VCs. When VCs participate in seed rounds, round sizes are on average 3x larger. VC seed round sizes have continued to grow by about 10% each year since 2010 and the number of MegaSeeds, i.e., those seeds greater than $2M, has grown by 5x in 3 years.
- Series Bs Are The Hardest Rounds to Raise. The growth in seed rounds and seed stage companies has expanded the number of companies raising Series A. The Series A market has responded somewhat. Total Series As have roughly doubled as seed volumes have tripled. But Series B rounds have remained flat. Because the capital allocated to Series Bs has remained flat, competition is increasing for those dollars and follow-on success rates have fallen.
- Growth Stage MegaRounds Have Replaced or Delayed IPOs. Megarounds, private market investments similar in size to typical tech IPOs of $75-200M, have become increasingly common, growing by 3x+ over the last four years. This capital enables larger startups to delay IPO and the regulatory overhead accompanying it.
The fundraising market is stable because today the many forces in tension, dollars in, dollars-out, exits, competition, and the public market, all balance out. I'm hopeful we won't see a significant change in the market for a while. But if/when we do, it will be because one of these forces suffers a discontinuous change.