In a recent meeting, a founder asked me what I thought of the fundraising environment. My answer was: it’s become incredibly sophisticated along three dimensions: diversity of product offering, pricing sophistication, and efficiency of investment processes.
If you read eBoys or Done Deals or Creative Capital, you’ll get a sense of the early days of the venture industry. It started out with six men at a famous restaurant in San Francisco hearing pitches over lunch. None of them could afford to lead the entire round, so they would syndicate and take turns on the board. That was the “industry.”
Today, we’re a far cry from a Sancerre and oysters lunch. Last year, startups raised the most capital in history, even adjusting for inflation.
Founders have at least five flavors of seed: friends & family, angel, pre-seed, seed, and post-seed. Founders can go it alone or partner with incubators and accelerators for almost every type of business. Founders can raise $7M Series As and $15M Series As. Would you like a series A from a generalist fund or a specialist fund? Founders can raise a $15M Series B or a $200M Series B. Would you like that Series B from an opportunity fund, an SPV funded by direct LP investment or from a third party?
Founders can IPO, ICO or raise a unicorn round in the private markets. Founders can crowdfund. Founders can borrow venture debt or employ revolving lines of credit. Founders can sell secondary at many more stages than ever. For the right business, the number of different financial products available has never been higher.
Startup valuations have become much more quantitative. That’s not to say startups trade exactly like the public market, but the pendulum has swung considerably from art to science.
The pricing mechanisms in the venture market are tied much more to the public markets than at any time I’ve been in venture. Public markets price high growth software companies in terms of enterprise value to forward revenue. So do private market investors. The multiples are similar across stages. My partner Annie who spends time in marketplaces tells me there’s a similar dynamic in consumer: price is a multiple of future GMV. There’s still art and judgement of course, but many times the art is debating a premium or discount on a base multiple.
The pace of the fundraising market has also changed quite a bit. The number of pre-emptive rounds is increasing. I wish I had data on this, but it’s a trend we’ve certainly noticed in our portfolio. For the most exciting businesses especially in later stages, investors catalyze fundraising processes, not founders. These pre-emptive processes require far less time to consummate than the classic process.
For founders who have established product market fit, a panoply of capital choices exist. In my view, the fundraising market in 2019 is the strongest it’s ever been. Founders have more options than ever.