What Hypergiant VC Rounds Tell Us About Startup Market Fear

At the tail end of July, WeWork’s Chinese subsidiary—WeWork China—raised $500 million in venture capital. It was WeWork China’s second round of outside funding, and it valued the company at $5 billion.

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Weeks later, in August, WeWork itself announced it had raised $1 billion from SoftBank’s Vision Fund via a convertible debt instrument. (Select Crunchbase data is now available on Yahoo Finance, more details here.)

With respect to raising merely enormous venture capital rounds, startups in China and the U.S. are basically neck and neck. But is that also true for an emerging class of companies taking aboard truly titanic sums of capital?

The short answer is no. In the rarified air of raising VC rounds totaling $250 million or more, Chinese companies far surpass their counterparts in the United States and the rest of the world.

The chart below plots the count of quarter-billion dollar (and larger) VC deals, per quarter, from 2013 through the end of June 2018.

A little while back, Crunchbase News began reporting on an emerging phenomenon in the world of VC funding. Startups are raising huge piles of money from venture capitalists, increasingly in sums of $100 million or more.

Because these mega-rounds shined so brightly on the funding landscape, and are so massive as to bend the curve of the market around them, we took a page from cosmology and dubbed these $100M+ rounds “supergiants.” Much like supergiant stars are among the brightest and most massive celestial bodies in the universe, supergiant rounds are the biggest and often most talked about funding events in all of startup finance.

But now, with supergiant rounds becoming an everyday occurrence, it’s necessary to borrow yet another cosmological term—hypergiants—to describe the rare but most massive of VC deals.

The era of super- and hypergiant funding rounds began around the end of 2013. With the exception of a minor pullback from the second half of 2015 through the middle of 2016, the number of nine, ten, and eleven-figure VC deals grew steadily. Fueled by growth in average deal size (particularly at Series C, D, E, and later) backed by ever-larger venture capital funds raised by the most entrenched firms, super- and hypergiant rounds burn the brightest.

Fear

The above chart essentially tracks the inverse of the amount of fear in the private technology market over time.

You can see fear in its fluctuations. The late-2015 to mid-2016 slowdown we mentioned before is known in tech circles as the “SaaS Crash,” a reference to declines in the public value of some cloud and software companies. Those declines spooked private investors deploying capital into younger companies in the same categories.

Fear went up, and hypergiant rounds went down.

Something odd happened next, however. After 2015 brought warnings from well-known players in the venture capital space like Bill Gurley that startup valuations were out of control, and the opening quarters of 2016 followed the warnings with closed wallets, investment started to pick back up. And once the hypergiant financing market found its footing, it just kept going up.

Years later, in the current startup and tech boom, some of those same voices have essentially stopped warning about an overheated market. Gurley himself recently told the New York Times that “[y]ou have to adjust to the reality and play the game on the field” when it comes to huge rounds and, we’d add, the resulting inflated valuations.

Supergiant and hypergiant rounds are on the rise as companies stay private longer and have greater access to capital than in prior business cycles. Those trends are not news. What is news is that the longer the market holds course it must come with more and larger checks to keep the game going.

That’s a lot of expensive, illiquid risk piling up in a single industry that only recently began to return to a healthy IPO cadence.

How private tech startup risk accretion shakes out in the end isn’t clear, but what is easy to see is that the so-called smart money isn’t scared. And for that reason maybe we all should be.

Illustration Credit: Li Anne Dias