it seems there is News every day about startup funding hitting record highs, new unicorn mining and tech firms going public. There is no doubt that we are in the midst of a long-running and rapidly growing enterprise bull market.
It all impresses us that every indicator in startup funding points up and to the right: Venture firms have more dry powder, deal sizes are growing faster, valuations are rising and investment terms are higher than ever before. – are friendly. And that’s all really happening.
But a closer inspection reveals that these trends are much more nuanced and apply very unevenly across the funding continuum from seed to end-stage. What’s more, most of the underlying truths and rules are not changing.
The enterprise alphabet soup of “A, B, C round” suggests that it’s all the same one after another, but it’s not. It’s like playing a completely different game.
beware of outsiders
The definition of the stage in the enterprise, the series from the seed to the final stage round D, E or F, has always been open to interpretation, and the general pattern at each stage is challenged by outsiders. Outliers – unusually large funding with high valuations relative to the maturity of the company – are as old as the industry itself. But these days, there are more of them, and outliers are more extreme than ever.
For example, Databricks raised two large private rounds, a $1 billion Series G and a $1.6 billion Series H, in 2021. These funding rounds are bigger than many IPOs in recent times, and Databricks is far from the only company to do something like this. This. According to Crunchbase, there were an average of 35 “megadeals” (over $100 million raised) per month from 2016 to 2019. This number is 126 per month in 2021.
This is mainly due to two major trends. First, the extremely attractive exit market has created economics to support mega late-stage rounds and venture rounds of $100 million or more. And, companies have been staying private longer, and they require additional late-stage capital before IPOs, which companies historically didn’t need. More on that below.
What is important for now is to accept the simple truth that aggregates and averages do not tell the real story of the broader market. The mean of funding round size and valuation give a better view of how the market is actually doing. So when you see the next report on a record venture funding month, pay close attention to what’s being launched.
Phases behave very differently
Most people think that substantial growth applies to the funding continuum, but that’s actually not the case. In fact, the enterprise bull market affects different phases very differently. The following is based on Cloud App Capital Partners’ analysis of PitchBook data on fully documented US financing (seeds through Series D) in the cloud business application space from 2018 to the first half of 2021.
The maximum effect is visible in the late stage. For Series C and D financing as a group, the median round size more than doubled to $63 million in 2021 from $31 million in 2018. Pre-money valuations increased by 151%, and ownership – the funding followed by equity investors collectively owned shares in the round – decreased from 18% to 12%. So the money involved has doubled, but Series C and D investors have a third less than they did before.