So is raising VC easy right now or what?

It’s harder to raise more venture capital than ever

It was the best of times, it was the worst of times. At least in startup land, where there was too much money and not enough.

Some people are noticing there is so much money, and VCs are complaining about there being “too much capital.” Deals are closing super fast, pricing discipline is going away, and diligence is decreasing as investors all pile on.

At the same time, when you talk to founders offline (as opposed to Twitter where everyone wants to signal that things are easy) they will say it is quite difficult to get started. More “early stage” VCs are no longer doing pre-seed while more angels want to see traction.

So where is the disconnect? Why are many early stage founders experiencing difficulty while VCs are amazed at how much money is around?

Something interesting is happening. To find the answer I looked at the numbers in the NVCA 2020 Venture Monitor.

There are indeed more dollars than ever, and the oversubscribed rounds are getting more oversubscribed. But the actual number of rounds are going down.

As you can see, there were fewer deals in 2020 than in 2015. In fact, the average deal size was 89% higher.

What’s driving this massive increase is the rise of mega-deals, which have tripled since 2015 and which now dominate the headlines (and therefore perceptions). More notably, mega deals were only 29.7% of all venture funding in 2015; today, it’s 47.9%. If you look at the data room, you can see that early stage VC has decreased as a percent of deals, but only modestly. There was a clear hit at the beginning of COVID-19, but early stage is only a little below where it was in the deal mix, and there is still a monotonically decreasing relationship between deal stage and deal count.

What this means is that there is more money than ever but it’s chasing fewer deals, mostly in growth and late stages. So valuations are going up in late stage but not in early stage deals; in fact, early stage valuations dipped this year even though early stage deals exceeding $25 million hit 65.7% of all deal value, an all-time high, thanks to increasing consensus on the top deals and the entry of players with lots of dollars, like Tiger, Altimeter, and SoftBank. The average, in other words, is hiding yawning inequality.

There is also something that isn’t captured in the numbers. Companies are jumping valuations very quickly. Companies like Ramp are raising rounds within months of each other and companies like Hopin are hitting unicorn valuations in just a few years, all while Tiger is doing a deal a day. VCs, who are seeing these dynamics every day, feel this as part of the broader market while founders only feel it for their startup, where individually it may be getting harder and harder. On the founder anecdote side, many of the top funds still have websites that say they “invest at the earliest stages” but now hardly ever invest before the Series A. This further affects founder perceptions of the market being relatively dried up.

So that’s where the disconnect comes from. Both sides are seeing the market correctly, just from different angles: VCs are repeat players so they see it longitudinally while founders aren’t so they only see cross sectionally. If you are a VC, you have never had more competition for the deals you want to get into. But if you’re a founder, especially in early stage, you just see a market that still hasn’t rebounded.