When SoftBank announced its first Vision Fund back in 2017, TechCrunch gawked at the size of the fundraising vehicle and its $100 million minimum check size. Noting a few of its early deals, we wrote that “the party is just getting started.”
Little did we know how accurate that quip would become. The Vision Fund poured capital into a host of companies with big plans, or what could at least be construed as grandiose hypotheses about the future. And after deploying $98.6 billion in a blizzard of deals, SoftBank left the venture capital market changed.
“Strange” may be the best way to describe today’s venture capital market, at least in the United States.
It’s not a stretch to say that the Vision Fund helped make the venture capital game faster in terms of deal pacing and larger in terms of deal scale. The Vision Fund was also content to write checks at amped valuations, leading some investors to privately carp about lost deals.
Today’s venture capital market is currently enduring another wave of venture capital angst, this time driven by Tiger Global. Tiger often writes smaller checks than what SoftBank’s capital cannon wielded, but its pace and willingness to invest a lot, very early, at prices that other investors balk at, is making waves.
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And while Tiger races to build what increasingly appears to be a private index fund of software startups that have reached some sort of scale or growth, the venture capital market is seeing its traditional benchmarks tied to different tiers of investment molt, meld or disappear altogether.
Old metrics that would ready a startup for a successful Series A are antiquated clichés. As are round sizes for Series A startups; it’s increasingly common for seed-stage startups to reload their accounts several times before approaching an A, and Series B rounds often resemble the growth-stage deals of yesteryear.
It’s confusing, and not Tiger’s fault, per se; the Tiger rush is a variation on the Vision Fund’s own venture disruption. The Vision Fund followed in the footsteps of a16z, which raised large, rapid funds early in its life and garnered a reputation at the time for having a willingness to pay more than other venture capital firms for the same deal.
Where does all the change leave us? In a fascinating, if turbulent, market for startup fundraising.
For example, The Exchange caught up with Rudina Seseri of Glasswing Ventures the other week to chat about AI startups. During our conversation concerning venture capital dynamics, Seseri said something incredibly interesting: With as much seed capital as there is in the market today, she’s seeing startups raise later Series As than before. But, she added, with the creep of late-stage capital into the earlier stages of venture investing, Series B rounds can happen rapidly after a company raises an A.
So, slow As and fast Bs. We wanted to dig more into the concept, so we asked a number of other investors about her view. We’re tackling the question in two parts, focusing on the U.S. market today and the rest of the world later this week.
What we found out is that while Seseri’s view regarding late As and early Bs is correct for many startups, it really depends on whether they are on the radar of later-stage firms. And yes, some of the investors mentioned Tiger in their responses. Let’s dive in to understand what founders are really dealing with.
Late As, early Bs?
Menlo Ventures’ Matt Murphy told The Exchange that he agrees with “the general premise that seed capital is allowing companies to get to more scale before raising an A.” Regarding Series B deals, Murphy said that Menlo is seeing “those happening more frequently, earlier, preemptively with larger round sizes.”
He went on to say that even a year ago, Series B rounds were raised 18 to 24 months after an A, but that “those intervals have been reduced to six to 12 months.”
How do startups manage such a rapid turnaround time? “Companies are raising when they’ve barely touched capital from the previous round because [offered] valuations are so attractive,” he explained.
But Murphy also said that while startups can get more done before they raise a Series A, the venture capital “industry has become so preemptive that the reality is the previous benchmark of $1 million ARR to raise an A has been relaxed, and we now see many happening at [$300,000 to $500,000]” worth of annual recurring revenue.
M25 partner Mike Asem wrote that later Series As and earlier Series Bs are “in line with [his] experience.” But the Midwest-focused investor added that “from the view of a seed-stage investor, the amount of dry powder at Series B and the willingness to” come down to what previously would have been a Series A deal — and shell out a massive premium for an explosive growth rate — has made the Series A investing market a “bit strange.”
“Strange” may be the best way to describe today’s venture capital market, at least in the United States. After all, if some startups are able to do more with seed capital, and get further before raising an A, how do we square that with some Series A deals getting done at ever-lower ARR thresholds?
Jai Das of Sapphire Ventures had an interesting perspective on our general question that could shed some light on the matter, saying that there is a “premium for companies that have Series A led by the top-tier funds.” Those companies, he explained, “can start raising their Series B as soon as the Series A closes (and quite a lot do), since the later-stage funds use the lead investor of Series A as a signal for the quality of the company and want to preempt their Series B.”
Perhaps, then, the early Series B trend is merely later-stage funds of all stripes allowing well-known, earlier-stage investors to do a bit of their homework by filtering the seed market for them with Series A deals. That signal can kickstart a startup’s next round from the moment the check clears.
But there’s even more nuance to consider. Perhaps startups can raise a Series A earlier if they are showing product-market fit, despite limited revenue history, while other startups that have less obvious fit are able to build more before raising their A? It’s not hard to come up with startup sectors where financial results come later than others, which could help explain the later A concept and the preemptive nature of today’s venture capital market.
Old school versus tiger speed
Geography also seems to play a part, at least for now. Seseri’s Glasswing Ventures is based in Boston and doesn’t invest much in the Valley. This likely explains why she is seeing two types of Series A deals: “typical” ones, as opposed to “preemptive” ones.
The “typical” old-school rounds with ARR requirements north of $1 million and “frequently closer to $2 million” seem to be characteristic of markets where capital is less generally available, and which later-stage funds are following less closely. But even outside of the Bay Area, things are changing fast: “The ‘typical’ is becoming the atypical because of the rise of preemptive rounds where the typical expectations on metrics go out the window,” Seseri said.
Preemption has been a recurring theme in our conversations with VCs for this piece. “Overall, once there are real metrics and proof of sustainable growth (even if it’s just a few months or spikes), funds start trying to preempt,” Maria Salamanca, an investor at Unshackled Ventures, told us. She didn’t name names, but pointed out that “Series B funds and beyond know that missing out on the earlier rounds of early growth likely means overpaying massively after the B or not even having a chance.”
Seseri also alluded to what’s driving this FOMO: “This dynamic is exacerbated by large, multiasset players that have come down market and are offering a different product than typical VCs — very fast term sheets, no active involvement post-investment, large investments amounts and high valuations.”
Murphy was more direct in naming the elephant in the room: “The late-stage firms definitely get super aggressive on As in the [$1 million to $2 million] range. We were just involved with one where a few VC firms were clustered around the same valuation and Tiger came in 50% above that. This pattern is being repeated weekly,” he said.
As you can imagine, other investors aren’t extremely happy about the dynamic — and it is having unexpected effects, Asem told The Exchange. “I’ve spoken to Series A investors who are frustrated by Tiger (or similar) stealing what normally would be a [Series] A deal from out from under them for a [third] time,” he said, “so when they do have one that no [Series] B shop is competing for … maybe they get cold feet until the traction makes it undeniably good.”
This is a workable example of what signaling risk can look like in the market.
Investors are adapting. Asem said that he’s seen “traditional [Series] A folks who’ve just taken somewhat of the ‘if you can’t beat ’em, join ’em’ approach, and have stopped focusing on smaller As and instead are more willing to write much larger checks into B.”
This is paradoxical, but can explain why things look so confusing to external observers; rather than late As and early Bs, we are seeing weird As and weird Bs — while seed deals just seem to be all over the place. But strange as the market may be, it could be an environment that is mostly good for startups.
“If a company is perceived as hot, it can command a very healthy valuation for whatever round it is raising,” Seseri said. And that sounds a lot tougher for the investors chasing allocation than the founder deciding which term sheet to approve.