An article in The New York Times, $100 Million Was Once Big Money for a Start-Up. Now, It’s Common, once prompted my thinking about the title’s observation that it is “common”.
However, I didn’t truly understand its implication until the emails started coming in from early-stage private company CEOs with links to the article asking if I had seen it and whether they needed to be looking at a mega-round in order to get VC attention.
WHAT? Even more insidious was the article’s implication that THEY could raise that much money for their companies.
The data cannot be denied; mega-rounds are a reality. They’re driven by lots of capital seeking outsized investment returns, fund sizes that require large checks to be written in individual investments and the investor defining an investment thesis and then looking for a company that fits it.
The result is large funding rounds to overwhelm potential competition and accelerate the speed of executing on the business plan.
This was particularly evident in the case with SoftBank’s support of WeWork to expand across markets and geographies and unleash a new wave of productivity around the world. It was a classic landgrab in which market dominance would be attained by the ubiquity of the platform.
While there have been over 500 mega-rounds since the beginning of 2017, there are thousands of other start-up financings at more traditional sizes and valuations. These business plans could not support the raising of $100+ million or provide the risk-adjusted return expected from the investors.
I call this the bifurcation of start-up capital.
It’s driven by new investors with large checkbooks and a willingness to swing for the fences in dominating a potentially enormous market.
We’ve seen this happen historically with certain technology subsegments raising disproportionately large rounds compared to more typical fund raises.
In the 1980s, the rapid advancements in biotech resulted in very large capital raises to support the incredible cost and lead time to go through the FDA approval process, where approval was no certainty. It was not uncommon for companies to raise 2-3 years’ worth of the estimated cash burn of the business in hopes that FDA approval would occur before the cash ran out.
Around the same time, advances in microprocessor design led to a new group of fault tolerant server platforms and a competition to dominate the emerging space. One example in 1986 was Stratus Computer that raised the (at the time) unprecedented venture capital amount of $25 million.
I still watch these mega-rounds the same way I watch Unicorns – they are a subset of the market that does not represent a larger trend or a shift away from what we traditionally see as the path to funding for most start-up companies.
