The high fundraising levels and increased valuation of portfolio companies could lead to a drop-off in early-stage fundraising, said speakers at the PitchBook Q3 Venture Monitor webinar last week.
Rob Freelen, head of venture capital relationship management for Silicon Valley Bank, said the current deal pace is not sustainable and could cause a bifurcation in funding.
“What I’m hearing from investors is that not only is this the most competitive market in the history of venture capital, but it’s leading to an overall sense of fatigue and frustration on the part of many top investors,” Freelen said.
He added that deal competitiveness and valuation inflation, where very early-stage companies garner massive valuations before delivering on revenue, is also weighing heavy on VCs.
Freelen pointed to an unnamed VC client who asked start-ups to refrain from sending complicated pitch decks. Instead, the VC wanted simple pitches to get to things quickly to keep up with the demand and head off investments coming from non-traditional investors like Tiger Global.
Q3 data from PitchBook and the National Venture Capital Association showed fundraising in the quarter rose to $238.7 billion. This brought US fundraising for the first nine months of the year to $96 billion, surpassing the entire total for 2020 of $85.8 billion, PitchBook reported.
This record-breaking year has caused LPs to question whether the current fundraising pace is sustainable, as reported by Venture Capital Journal. LPs feel they cannot keep up with the number of funding rounds so close together, coupled with the size of funds being raised in a short amount of time.
Freelen noted that the pace of fundraising might even mean early-stage VC funding declines while mega-deals continue to grow. This does not mean, however, that early-stage companies will not see investment interest. He said more VCs and non-traditional investors would be attracted to seed and Series A start-ups in a bid to be involved much earlier in a company with strong potential for growth.
“The upside is that most VCs are finding ways to improve their approach,” Freelen said. “You don’t have to look any further than Andreessen Horowitz to look at a firm innovating on the business model.”
Mega-fundraising drove this increase again, with a total of 19 fund closings of $1 billion or more through the end of September, according to PitchBook. Big-ticket fundraising accounted for more than 57 percent of the fundraising value during the period.
Another speaker at the event, Affinity vice-president for marketing Paul Ross, echoed Freelen’s sentiments and noted fundraising has sped up. “It was a concise amount of time between us establishing what our value was to the investment market to closing that out,” he said. “I don’t see that changing dramatically until there’s some major reset in the market for funding.”