For VCs the current game is musical chairs

There has never been an easier time to become a venture capitalist. Nearly everyone in the industry is raking in money, either through long-awaited exits or because more capital flooding into the industry has meant more money in management fees — and sometimes both.

However, early-stage investors have begun to be more cautious about how fast deals are being made. The reason is not that they are finding it more difficult to issue checks at a pace that feels reasonable at the moment. Most VCs also feel that pricesensitivity is no longer an option. Many founders they collaborate with are receiving follow-up checks to determine how best to distribute their final round of funding.

Consider that from 2016 through 2019, an average of 35 deals a month featured rounds of $100 million or more, according to the data company CB Insights. This year, that number is closer to 130 of these so-called mega-rounds per month. Companies that are maturing can barely contain the froth. CB Insights reports that the U.S. Series A median valuation was $42million in the quarter. This is due in part to crossover investors such as Tiger Global which closed 1.26 deals every business day during Q2. Andreessen Horowitz was not far behind.

This makes it difficult for Jeff Clavier (long-time investor and founder of early-stage venture company Uncork Capital), to understand the market. Clavier, like many others in the market’s boom, is reaping the benefits of this booming sector. Among Uncork’s portfolio companies, for example is LaunchDarkly, a company that helps software developers avoid missteps. The seven-year-old company announced $200 million in Series D funding last month at a $3 billion valuation. It is triple what it received in valuation early last year.

Clavier says, “It is an amazing company so I’m excited for them.”

He also said, “You must put the money to use in a very intelligent way.”

This is not easy to do in this market where investors are constantly calling founders and asking for terms sheets. (“The most absurd thing we’ve heard are funds that are making decisions after a 30-minute call with the founder,” says TX Zhou, the cofounder of L.A.-based seed-stage firm Fika Ventures, which itself just tripled the amount of assets it’s managing.)

A company can have a longer lifespan if it has more money. However, investors know that money can be a distraction and hide important issues until they are too late.

A higher valuation often means that you will take on more money. However, these valuations have their positives as well as negatives. A company with a large number can draw more attention from the media, customers and potential employees. Renata Quintini, a venture partner at Renegade Partners who focuses mostly on Series B-stage businesses, says that “the more money you raise the better the value it is.”

In today’s marketplace, slowing down can be difficult. Quintini states that many founders she has spoken to say they won’t raise more money, explaining that their business model cannot support more funding. For others Quintini continues: “If your competition is raising, they might have more war chests and can push the market forward, so maybe they can out-hire or outspend you where they can generate more traffic than you.” The next check becomes the best path to survival, which often comes at a higher valuation.

Many VCs argue that valuations today make more sense as companies create new markets and grow faster than ever before. In some cases it may be true. Indeed, publicly traded companies have seen the valuations of companies previously thought to be highly valued by private investors like Doordash and Airbnb rise.

Clavier agrees with other VCs that “valuation can be completely detached from [companies] multiples”.

This might sound like the type of issue that investors are most interested in. This depends on the length of this market, as it has been for many years.

Clavier claims that Clavier’s own company, which “did a fantastic Series A” and a brilliant Series B before its time, is being preempted to make way for a Series B. The valuation of the companies is completely out of line with their real reality.

He said he was happy for the outfit because “I have no doubt that they will catch-up.” This is what’s important: They will need to catch up.

For more from our conversation with Clavier, you can listen here.

Publited Fri, 3 Sep 2021 at 06:26.34 +0000

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