Who Is Getting It? Venture Capital, That Is
We’ve had a rocky start to February in the capital markets. Many of us have heard that “winter is coming” (and if you’re in Boston, it’s already here with what feels like blizzards every other week).
The concerned sentiment we read about via Medium and other blogs doesn’t exactly match the headlines – and from an entrepreneur’s perspective, it may be frustrating to reconcile headlines that cite billions of dollars of venture capital invested, as they may be experiencing increasing difficulty in finding or accessing venture capital.
PitchBook reported that during January 2016 $14Bn of venture capital was invested worldwide (granted, $3Bn into Chinese Internet company Meituan-Dianping). There were 50 different instances where companies raised in excess of $50M.
With billions flowing, why does it feel so hard to raise money? While an unprecedented amount of capital has come into venture, most of that capital has gone to expansion and late stage rounds, and “private IPO” rounds (inane term acknowledged). According to PwC and the NVCA, of the total $59Bn that was invested into U.S. venture-funded companies in 2015, $38Bn (65%) funded expansion and later stage financings. Only two years earlier, in 2013, $19Bn, was invested in these later-stage segments—that’s a near doubling of the dollars invested.
As an early stage investor, I pay more attention to what is happening in the seed and series a landscape. Seed-stage investing is, in fact, down slightly: $900M invested in 2015 versus $1Bn in 2013. Even adjusting for the shifting nomenclature regarding what is considered a pre-seed, seed, or series A round, the vast majority of venture capital dollars are going to later-stage companies to fuel (what’s perceived and hoped to be) ‘escape velocity’ growth. Non-traditional investors, like hedge funds and mutual funds, have joined the venture landscape to fund this growth and “all of those billions” are mostly going to later-stage companies.
At the seed stage, investment levels have stayed fairly consistent for the last 10 years, again, recognizing that definitions are blurring between seed and early stage.
How To Get Some Of It? Ignore trends, focus on building outstanding companies
We expect investors’ uncertainty and hesitation regarding the current capital markets will be reflected in valuations. And we’re certainly not alone: 90% of 150 VCs surveyed by Mark Suster’s Upfront Ventures expect valuations to decline in 2016.
Despite valuations adjusting and despite the current tenuousness of global economic climate, venture capital is available. Long-term investors, committed to the asset class, are still here, are stilling looking to invest in high-potential opportunities, and are not trying to time markets. So, how to access seed stage (or any stage) venture capital? Knowing how to access it in this climate is probably even more important.
- Do the research. Raising money is a sales process. Identify the ‘right’ prospective funding sources (VCs, angels, seed funds) to determine fit. Does the company fit into the investor’s targeted investment areas and stage? Or, has the investor already backed a competitor or a substitute? Do the work. The info is there out there.
- Do the research. This time on the business. On the market. On the competition. Do not try to raise capital before doing the deep and hard work. Talk to customers, even if they are only prospective customers. Test the hypothesis. Is there evidence that the customer will buy, use, adopt what’s being built?
- Get solid introductions. Getting introduced to an investor by someone who knows both the entrepreneur and the investor is oft-repeated advice. Because it really matters. The “introducer” lends credibility to the founder and to the company, especially when he or she knows the founder(s) really well and can speak to their qualifications. Maybe it is a former CEO or manager, a peer, even an associate, or a former customer—someone who is well-connected and willing to vouch for the team and the market opportunity.
- Look for a Lead. Look for a lead investor first; there are plenty of followers who will join into a round once the lead investor has priced and structured the terms.
- Ask for the investment. Ask what the investor’s decision process is. Ask if they are interested. Early and quick no’s are good. Again, raising money is a sales process and knowing which investors not to focus on helps speed along the process.
- Do references. An entrepreneur is ‘buying’ also. Find out what an investor is like to work with. Talk to fellow entrepreneurs who have worked with the investor before. Is the investor well-positioned within their firm—will they be able to deliver follow-on dollars when merited?
- Read. Read. And then read some more. There are many valuable resources available about the fund-raising process. One of our favorites is Mark Suster’s Raising Venture Capital and it includes links for deeper discussions on specific topics.
Venture capital is available. The qualified team with a researched plan can “get some.”
-Maia | Senior Managing Director