“Money is like gas in the car — you need to pay attention or you’ll end up on the side of the road — but a well-lived life is not a tour of gas stations!” – Tim O’Reilly

Those gas station stops are now further down the road and the price of gas just went up.

Over the last six months there have been tons of articles talking about non-traditional investors entering the venture funding market, mega rounds, unicorn valuations, then write downs, crappy IPOs, down rounds, and how all of this has effected the venture funding market.

I’ve put a short primer together of what I’ve pieced together. If you want to dive deeper, I’ve added links with more information on these points.

State of the Venture Funding Market Lately

  • By either metric, number of deals or money invested, total venture funding in North America spiked in Q3 2015. [CB Insights]
  • In Q4 2015 total investment in North America dropped by 32%, and number of deals dropped 24%. [CB Insights]
  • Globally, in Q1 2016 we saw a quarterly drop in deals by 19%. [Pitchbook]
  • However, global aggregate investment increased 13% since Q4 2015 [Pitchbook]
  • Meaning, larger rounds per deal to keeping portfolio companies out of the funding market longer (longer distances between gas stations) [This Week in Startupsspecifically around 4 minutes]

Lower Valuations

  • Looking for higher returns, non-traditional investors like mutual funds and hedged funds, entered the venture market. [CB InsightsBloomberg & TechCrunch in 2014]
  • Large amounts of new capital flooding the market drove up valuations, specifically in the late stage. [Mark Suster]
  • Late stage private valuations exceeded valuations public markets accepted. [Pitchbook]
  • When companies IPO’d they we repriced by the public market to more acceptable fundamentals. [The Economist]
Sources: Economist, CB Insights, Dow Jones Venture Source
  • Private to public repricing caused mutual funds and hedge funds to market-to-market their portfolio companies causing write downs. [Fidelity write downs: Bloomberg, Tech Story, The Mortley Fool, more write downs on March 31, 2016]
  • This repricing in late stage private portfolios caused a ripple effect, all the way down to Series B.
    • Series B is priced using the same methodology as late stage deals, using a forward multiple of revenue [Tomas Tunguz & CB Insights]
    • Late stage investors slowed down completing deals and became more selective on quality, raising the bar of deals completed. [Mark Suster & This Week in Startups]
  • The repricing of Series B and later deals doesn’t effect Seed and Series A directly, but does indirectly.
    • This caused earlier investors to question if further rounds of funding could be obtained later on. [Tomas Tunguz]
    • When Angels’ public equity portfolios under-preform they don’t feel overly rich, and not as confident about tying up cash in illiquid startups.

What does all of this mean? Lower valuations + Larger rounds = Higher cost of capital for Founders (gas got more expensive)

I’m not in the VC or investment banking business, but I’ll take a simple guess at what this means going forward:

  • This is not doom and gloom, it’s a correction in pricing. LPs are still allocating cash to VC funds and new funds are being launched. Cash is still out there, it’s just harder to get and more expensive. Founders will give up larger percentages, meaning their cost of capital is going up. [First Round Capital]
  • Founders will be focusing more on contribution to gross margin, CCA and general burn rates. This will prove interesting in winner-take-all markets where aggressive growth means everything. [Mattermark]
  • Startups who don’t meet the newly raised funding bar will run out of cash if their economics don’t work.
    • Best case: their valuations drop and they become a cheap acquisition targets for healthier, higher quality, better funded companies.
    • Worst case: they go out of business and there is a flood of talent in the market.

Did you ever think public equity investors could make such an impact on all stages of the venture funding?

Shoot me a tweet and let me know what you’re seeing in the venture funding market.

Read Chris’ previous articles


Chris Kay is a Financial Analyst, Co-founder of Multiplicity. Follow him on Twitter – @ChrisJKay
By day, Chris is a Financial Analyst working with entrepreneurs and angel investors on their personal financial affairs.

By night, Chris is an active member of the Toronto tech start-up community. Chris is a two-time mentor at Techstars Startup Next Pre-Accelerator program, the #1 startup pre-acceleration program in the world. Prior to co-founding Multiplicity, Chris acted as the Group Manager of the Ryerson Angel Network.

Chris studied Finance at Ryerson University, and has obtained his Canadian Investment Manager (CIM) and Chartered Alternative Investment Analyst (CAIA) designations, he is also a CAIA Canada Chapter Executive based in Toronto. Chris has completed the Level 1 of the Chartered Financial Analyst program.