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Fissure grows between early and late-stage investing

When Kleiner Perkins agreed last fall to split into two, it explained the move as a consequence of a changing venture landscape and the diminished overlap between its early- and late-stage operations.

The company building and the necessary specialization of seed and Series A rounds didn’t necessarily walk hand-in-hand with the larger check sizes of growth.

Kleiner Perkins isn’t the only firm to reach such a conclusion. Venture seems to be witnessing a divergence between the late-stage and early-stage skill sets.

With the proliferation of billion-dollar-plus funds, on one hand, and a newly entrenched generation of seed investors displacing traditional A round deal makers, on the other, venture is looking more and more like two different businesses.

Venky Ganesan
Venky Ganesan, managing director, Menlo Ventures. Photo courtesy of the firm.

“The skills have changed,” said Venky Ganesan, a managing director at Menlo Ventures. “The number of truly early-stage investors is shrinking. A lot of VCs have moved from early-stage product-based investing to mid- to late-stage metrics-based momentum investing.”

Part of this is due to the influx of money from crossovers and other non-traditional sources, such as SoftBank’s massive $98 billion Vision Fund. Deep-pocketed investors pushed rounds sizes higher across stages, but most noticeably at the later stage. At least 140 highly valued unicorns now roam the investment landscape, and $100-million-plus rounds set a record in 2018. Through secondaries, late stage is beginning to take on the role of an exit market for earlier backers.

Keeping pace, Series A rounds themselves have expanded to resemble the Bs of not that many years ago, with maturing companies raising handsome sums for early scale up.

Meanwhile, seed deals look a lot like As did previously, with companies able to start on less money and pre-seeds filling in the funding gap for the earliest of enterprises. A lot of the company-building work takes place here. No surprise, these seed investors are frequently ex-entrepreneurs, while late-stage ranks can be filled with investment bankers and former analysts.

Whether this will continue is, of course, hard to say. With the recent public market turmoil, momentum investors, such as hedge funds and sovereign wealth funds, have begun backing away from the market.

“Some of the momentum is gone,” said Sandy Miller, a general partner at IVP. “We don’t them as much in deals right now.”

Even seasoned crossovers and experienced VCs have shown a willingness to pass on deals viewed as too richly priced.

As a result, valuation multiples seem to be falling. Revenue multiples on new-deal valuations could be down 10 percent to 40 percent, Miller said.

“We’ve already seen a moderation,” he said.

If capital chasing venture deals falls this year, as some predict, the industry’s skill sets may again begin to converge. If not, expect the dichotomy to continue.