Bigger Checks, Days To Close: How 2021’s Red-Hot Venture Funding Landscape Is Shaking Up Early-Stage Investing

Startup funding around the world is on a tear this year and, increasingly, it’s not just traditional venture investors driving that growth.

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Globally, venture investment is up 95 percent year over year to at least $288 billion through the first half of 2021. North America and Europe have seen even greater gains, and funding is up at every single stage, per Crunchbase data.

Just as notable as the eyebrow-raising sums of money being deployed is the cast of characters spending that capital. Growth equity — traditionally those firms that invest in mature private companies — are now competing with VCs by investing more money into startups and at earlier stages of funding.

All of those factors, investors we spoke with say, are making early-stage investing a much more competitive and faster game for all involved.

“The time between meeting a founder and closing a round is getting shorter and shorter because there’s so much liquidity,” said Karim Gillani, founder of Luge Capital, a Montreal-based seed and Series A fund focused on fintech in the U.S. and Canadian markets.

“Companies that have meaningful proof points or meaningful traction nowadays often have a lineup of investors ready to deploy,” he said.

The later-stage funds are less price sensitive, he noted, and the speed at which deals close often impacts the diligence process. “We would meet founders one week and the messaging would be, ‘Hey if you’re interested we’re gonna do our first closing next week. Let us know — in the next day — if you’re in or you’re out.’ ”

Investors can find themselves losing out on deals if they don’t move toward close in a matter of days, he said. “We will be talking to a company and we’ll be in the process, and then midway through our process they’ll call us up and say, ‘Sorry, we just closed on another investor. We have to stop the process with you guys.’ ”

Bigger rounds, earlier

Median and average round sizes have increased through the last decade, per Crunchbase data, with global funding seed, series A and series B rounds up across the board since 20121.

“Earlier-stage rounds are beginning to look like later-stage rounds from 10 or 15 years ago,” Gillani said.

He notes that deals are getting done a lot faster and that rounds are priced higher and higher.

For his firm, which was founded in spring 2018, that has already meant reevaluating its investing profile and business model just a few years in.

“It’s increasingly difficult to still get access to high-quality deals or get into high-quality deals, while adhering to a model that was built three years ago,” Gillani said.

In the few years that the firm has been investing, it’s had to amend its investing profile, he said: “When you build out a fund, you have to model it out, and you have to typically make assumptions about check sizes for various round stages.

“And we’ve had to update that model a few times over the course of the last three years because round sizes are increasing. What we typically would have seen for a pre-seed or seed or Series A in some cases have doubled or tripled in terms of rounds; and sometimes even more. And you hear — it’s not surprising these days — about Series A rounds north of $20 million or $30 million.”

Founders increasingly seek speed when raising funding, he said. “If I were a founder, I can certainly empathize with that situation because you’re motivated to find the right investors as quickly as possible so that you can build your business. You don’t want to spend your whole life fundraising.”

Impact of COVID

In the past year and a half, investors have also expanded their horizons.

“COVID-19 has made the investment world even flatter,” Rob Kniaz, a partner at London-based Hoxton Ventures, said via email.

Hoxton invests at pre-seed, seed and Series A. “If an American fund is looking across the country for deals — and doing them remotely — then extending to Europe is a logical jump. We’ve seen lots of As and Bs getting global interest where that wasn’t the case a few years ago,” he said.

Seed rounds are somewhat protected from the markups seen in follow-on rounds, he noted. “The PE and late-stage hedge fund type folks are certainly marking up seed deals a lot more at the next round(s). But seed is pretty hands-on and requires more time per company. So, there’s a natural barrier that — while those funds can easily do lots of seeds — the founders can see sometimes the giant funds aren’t a great fit because you’re just a tiny check in their giant portfolio versus the more relevant fund sizes that can be a bit more useful.”

A mutual fund on Silicon Valley

Don Butler, managing director at Thomvest Ventures, joined the firm in 2000 at the time of the dotcom bust. “I realized in hindsight you got to learn how things go bad with companies and all the mistakes you can make on investments,” he said.

The firm was founded and backed by Peter Thomson, whose family is the majority owner in Thomson Reuters. Thomvest has offices in San Francisco,Toronto and Plano, Texas. Founded in 1996, it was initially a generalist investor but is now focused on verticals including fintech, which includes insurance and proptech, as well as cybersecurity and cloud infrastructure.

“I’ve always thought a good product would be a hedge fund or mutual fund on Silicon Valley,” said Butler, commenting on the speed and volume of Tiger Global Management‘s investments in later-stage companies, but also in some earlier stages as well.

“And if you have a mutual fund of the most interesting companies in venture there’s inevitably going to be one or more of those power law companies in there that are going to distribute quite a bit.” The best returns in the industry can be massive, he acknowledged, by 50x or greater.

However, “every time you move quickly, you make these trade-offs on diligence, you make trade-offs on intimacy with the company,” said Butler, who wonders if these fast-paced investors will be in a position to support portfolio companies if there is a downturn.

Exceptional opportunities

“Most private investors we talk with believe that the fundamental opportunities they are seeing in their portfolio, in companies that they’re considering investment in, is so exceptional that it’s very difficult to sort of sit on the sidelines, even as you watch prices and valuations increase,” said Ben Savage of Clocktower Technology Ventures.

“If the pandemic taught us anything about the future of technology, it is that the world  is a much smaller place as a function of technology,” he said. “And that the ways in which tech is capable of profoundly transforming all of our lives, I think were conceptually visible prior to the end.

“Millions and millions and millions of people came to these realizations and defined the pandemic period,” he said.

Crunchbase Pro queries referenced for this analysis

• • Global funding in 2021
  • Tiger Global Management fundings in 2021

Correction: An earlier version of this article provided an incorrect title for Don Butler of Thomvest Ventures. He is managing director at the firm.

Illustration: Dom Guzman