By Kenzi Wang
The past five years have seen a seismic shift on strategic investment deal flow. Arguably, we’ve gone through two large, definitive periods of modern-day venture capital tech fundraising. We’ll call the first period the Pets.com era, and the second the Facebook era. The Pets.com era was filled with extravagance, greed, speed and a lack of oversight, while the Facebook era was filled with proof, growth, patience and diversification.
With more than 20 years of experience and lessons that venture capitalists now have to draw upon since the Pets.com era, there’ve been many landscape changes around fundraising institutions, process and flow. Some fundraising lessons have occupied the top of search-engine results for years, and successful entrepreneurs have passed on the lessons of their “wins” from years ago to a new generation of entrepreneurs. Today, many of those fundraising do’s and don’ts have evolved — you just don’t always hear about them because of the powerful stories of the past.
Here are the top 10 fundraising-landscape changes between 2012 and 2017:
- The rise of more funding stages such as pre-seed, post-seed, pre-A…
Five years ago, there were the traditionally coined seed round, A round, B round and so on. Now, there are a lot more stages because funding events are getting bigger and bigger. The pre-seed round is now the same size as the seed round was five years ago, while the current seed rounds are sometimes as large as a previous Series A round. Because of that, getting from seed to A takes a lot more effort. And because of that, there are now the so-called post-seed and pre-A (mini-A) rounds to bridge companies to Series A.
- Popularity of SAFE (Simple Agreement for Future Equity) for seed-stage fundraising instead of convertible notes
Y Combinator came up with the extremely founder-friendly SAFE agreements, which removed an ample amount of headache for founders. Instead of having to sign the traditional convertible notes, typically involving interest, pay back, lawsuits and more, the SAFE agreements simplified and streamlined the process by changing from interest-based loans to a future equity structure. 500 startups and other incubating programs quickly followed suit. Now it’s the most popularly used document for seed funding.
- The rise of crowdfunding
Kickstarter (mostly for hardware startups) and Wefunder (crowdfunding to up to $1M) popularized a new channel of funding sources from non-accredited investors.
- Micro VC crunch
The glut of micro VC funds in the market has driven the performance bar higher for them to raise subsequent funding. They are now feeling extreme pressure to show better performance to endowments and funds-of-funds in order to hit their target raises.
- Seed round founder’s market
Because of the vast availability of new funds and old funds getting into the seed market, as well as the popularity of founder-friendly SAFE instruments, it’s becoming easier for founders to raise their first seed.
- Post-seed rounds frequently bridge equity round
Because the bar for Series A/equity round has risen due to seed rounds getting larger, many companies find themselves having to raise post-seed, or pre-A or extension rounds, in order to generate attractive metrics for an equity round.
- More foreign (cross-border) fund players in the market
In the past two years, a glut of foreign funds from Europe and China have entered the market. They are cross-border funds investing either in dollars or in their native currencies. These new players on the block are funding companies looking for alternative resources or help in international expansion.
- Incubating programs accepting later-stage startups as a boost to Series A
More and more incubating programs are now accepting later-stage companies because of the vast availability of seed money driving up metrics. There is now a breed of companies targeting top-tier incubating programs, generating traction quickly, and raising a Series A immediately post-incubation.
- Private equity firms come into the later-stage rounds
PE firms have always played in the rounds most immediate to IPOs. Now, because companies push to stay in private longer and late-stage financing has become bigger, they are coming into earlier rounds in a company’s life cycle.
- Family office directly investing in startups
Limited partners, including family offices, used to stay out of direct venture capital investments, but lately some family offices are getting directly involved in startups in the early stage. They provide an alternative source of investments, while bypassing the VC firms.
As a fundraising entrepreneur, it’s your job to be fully aware of the current landscape you’re up against. That way you’ll make the best decisions for your company, while always paying homage to the lessons of the Pets.com and Facebook eras. Whether boom, bubble or bust, the flow of venture capital will always find its way into great technology, entrepreneurs and ideas.
Author Kenzi Wang is a serial entrepreneur and tech investor with deep experience in enterprise and marketplace. He’s the founder and CEO of Traction Labs, incubated at Y Combinator and funded by top-tier investors, including NEA. Traction Labs is a marketing platform with many Fortune 100 clients, including Sony, Salesforce, Yahoo and HPE.
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