The unprecedented liquidity that has entered the venture market in the past year has spurred several trends that require VCs to adapt to a more competitive environment where startup founders have far more leverage than they did in the past.
Structurally, there are only so many startups looking to raise capital, and even though some founders may be opportunistically pursuing deals they wouldn’t have previously, the supply of capital into venture funds has nonetheless outpaced the demand for those dollars.
This means VCs are in an unusual environment of increasing competition to get in on deals with startups, and as they jockey to win spots on cap tables they’re moving faster than ever to close deals.
The best early-stage VCs take the time to find the founders they believe in and who need their expertise, because they’ll be right there working with them for the long haul.
What’s more, newcomers in the VC market like Tiger Global as well as a number of non-VC investment funds like PE firms with much larger pools of capital than the market has seen are aggressively pursuing enormous deals in an effort to drive faster exits and returns on their investments.
With so many investors vying for their attention, many founders are taking the opportunity to raise bigger rounds and coming back for additional funding faster than ever, which is apparent in the constant drumbeat of funding news as well as the 250 unicorns and the record $288 billion invested in startups in the first half of this year.
How can VCs adapt and be competitive?
For some, the answer may be moving faster to get in on deals. Strategies like doing more due diligence in advance of ever meeting startups and leveraging technologies like AI to supplement investors’ ability to evaluate companies can help with this. For others, it may be making larger investments and accepting smaller ownership stakes in startups than they’re accustomed to.
Both of these approaches have their drawbacks, however. Smaller stakes mean less upside on investments, and moving faster inevitably leads to missing crucial bits of information on companies and less time to get to know founders and their teams. We’re not the only ones sounding this alarm. As Zach Coelius puts it: “Capital is flooding into the VC market because of high returns in VC. That leads to more investors splashing money around and driving up prices and investing in companies that shouldn’t be invested in.”
As an extremely founder-focused VC, our first rule in making an investment is that the founders are excellent at what they do and are people we’ll be happy to invite into our homes. We simply must take the time to get to know founders. We’re not compromising on this selectivity even with the increasing competition for deals.
This is particularly challenging when studies have revealed that for founders, the most important thing when working with investors is for them not to waste their time. Especially in this current climate, when they’re being inundated with interest from VCs, founders can all too easily wind up with their attention spread thin if they’re taking every call or meeting.
Why do we think this approach is worth sticking to?
In short, it provides a competitive edge. The best early-stage VCs take the time to find the founders they believe in and who need their expertise, because they’ll be right there working with them for the long haul. We think, especially at the early stage, nearly every startup needs at least one VC who they have this kind of close working relationship with to help grow their companies.
In our case, we bring a wealth of experience in sales to help our founders develop the sales systems they’ll need to scale, but every startup has its particular needs and should seek out investors who offer them the support they need.
As startups gain traction and need capital to turbocharge their growth, they may bring in more investors like the Tiger Globals of the world who can cut them much bigger checks than other investors. We see that happening in a way that complements how early-stage VCs work with founders. So yes, competition amongst VCs is on the rise, but we’re finding that focusing on bringing founders far more value than just dollars is what most founders want and need as they build the groundwork of their businesses and prepare to scale.