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Never Raising, Always Raising

Startups used to raise once every 18 months. Today, we joke in Startupland that a startup is never raising and always raising. The implication is the most sought after companies often receive offers, whether they are in market raising capital or not.

Take a moment to think through that statement with me. Venture capitalists and boards used to value a company every 18 months. Then, every 12 months. Now every 6 months or every 3 months some startups receive termsheets valuing their business. We, as an industry, are marking-to-market much more frequently than we used to.

If things continue as they are, the venture capital ecosystem will mimic the stock market, which marks companies to market every minute. Just kidding. I can’t see that happening for a number of reasons, but the trend is real: with more dollars to invest, the market is becoming much more liquid.

Access is the scarcest resource in Startupland, the access to buy shares of hypergrowth startups. At the same time, venture capital fundraising sets records each year. Facing scarce access to startups, but bountiful billions burning a hole in our wallets, investors are innovating.

The pre-emptive round started a few years ago. Excited about a business, and the company isn’t raising till next year? Research them ahead of their process and present them with a term sheet next week. Entice them to skip the process with a healthy forward multiple.

Then, secondary programs emerged. Facing 11 years to IPO rather than 4 years two decades ago, startup employees began clamoring for some liquidity as a company matured. Initially, these secondary sales were occasional transactions, but as demand swelled on the buy and sell sides, today many late stage companies provide liquidity on a regular basis empowering employees to swap shares for dollars with secondary buyers.

Next, the Special Purpose Acquisition Company boom. The recipe for a SPAC is just like baking a cake. Raise some dough, let it rest for bit while you hunt for an exciting company, fold an exciting startup into the mix, and once the baking soda has done its work, put the package in a hot oven (public market) and watch it rise.

The direct listing, another financial innovation, relies on by pre-emptive private rounds to eliminate the need for raising capital at IPO, while simultaneously assuaging concerns over fees and mispricing (the IPO pop phenomenon).

The most recent innovation: the venture capital index fund. Hedge funds have entered the market in 2020, participating in upwards of 60% of all transactions to create an index of mid-and-late stage venture capital.

30% more dollars exist today than 18 months ago. Technology companies are fueling much of the growth in key economies, but access to those businesses is limited. When you have a supply/demand imbalance like this one, the financial markets innovate to trade dollars for shares in creative ways.

There are second-order effects of these market dynamics. Valuations and round sizes have ballooned. Competition reinforces the importance of differentiation in the market. Venture capital funds, which used to raise every 3 years, now raise every 12-18 months to keep up with the pace of the game on the field. In the middle of the maelstrom, founders enjoy simpler and faster fundraising processes on better terms.

Stanley Druckenmiller once said, “It’s liquidity that moves markets.” The tsunami of cash in the private markets has hurtled the venture capital industry forward with at least five key innovations.