Busy week in our market. Private tech growth investors of all flavors – corporate, financial and crossover – deployed $2.5 billion since last Friday.
Interesting to note how active the corporate investors were. Strategic priorities such as mobile and virtual reality were backed by significant balance sheet commitments. The snapshot of this past week also reinforces how broad and how global the market has become.
Much-discussed tech bubble fears should be abating as Q3 growth financing activity slowed relative to the first half of the year and the same period last year. CB Insights has relevant data here (Subscribers Only).
Despite the mild drop in Q3 total capital commitments, CEOs considering raising capital can rely on a private growth market that is still very healthy. The chart above affirms that 2014 investments through September 30th have already exceeded all of 2013 in volume and capital. If Q4 stays on the Q3 pace, the market will have delivered in excess of $32 Billion of growth equity to the tech economy. The private market capital commitment will about equal to the IPO market with the inclusion of Alibaba’s $22Bn largest IPO in history. Normalized to exclude Alibaba, the private growth market in tech will have invested a bit more than 3x the tech IPO market to grow companies in our sector.
Private investors, traditional, crossover and strategic, continue to deliver capital in round sizes competitive with the IPO market. Halfway through October we have already seen rounds over $100M for Houzz and Docusign and rounds of $60M or more for MetricStream, TrueCaller, Solidfire, Beepi, Alteryx, Good Technology and Minerva Project. Rumors are about that Google may be making a $500M minority corporate venture investment in Magic Leap, a company that has not actually announced a product. Capital in the private markets remains very much available for compelling companies.
Unicorns and bubble fears are making headlines, but private growth investment in tech actually declined in Q3 relative to the same period last year. The market is still active and healthy. Investment volume increased 18%. However capital committed dropped a bit as average round size contracted from $67M to $50M. Our numbers are growth deals – those over $15M – so it is not intended to capture angel, seed, typical Series A, etc. We track the volume of growth investing in North America and Europe.
The private financing market is favorable. So much so that we now have Facebook pages set up to count and follow the unicorns – venture-backed companies that have raised capital at valuations above a billion dollars. This is not a bad thing. It means the private market has the depth to finance a company on attractive terms for as long as the Board decides the company should stay private.
However, the expansion of available private company valuations has implications a Board and a CEO should consider when pricing the next round. A big step up in valuation means the collective team – leadership, employees and existing investors – are signing up to produce a much bigger outcome.
‘Let’s delay the financing. If we wait two quarters we will close a couple of things in the pipeline and will command a higher valuation.’
The logic seems very solid. However, it’s usually a lousy idea. First, no one can predict the future. You may win two new key customers, but you might also unexpectedly lose two key existing ones. Second, if you are growing well enough to attract capital, the same “wait and get a better price” logic will still apply two quarters from now, delaying your financing in perpetuity.
We thought the “I don’t invest unless I can drive to the company” mantra had left Sand Hill Road a few years ago. The venerable firms have opened offices in outposts like Beijing and Bangalore. Other cities tout their own “Valley-like” ecosystem, the Silicon Alley, Prairie, Roundabout, Beach, Tundra, fill-in-the-regional blank. Coding skills are spreading globally: the TopCoder 2013 Open coding contest included entrants from 152 countries. Incubator spaces sprout like Starbuck’s on every urban corner. Competing in a business plan competition seems to now be a requirement for an undergraduate degree in any discipline.
Yet, a look at the late-stage dollar flow over the past three years suggests investors are creatures of habit. Growth stage investors are piling capital into the companies they know the most about – those that are near offices in Menlo and Palo Alto.
Given the investment pace has been strong, trade sales are keeping GPs busy returning capital and several firms have closed new funds this year, the need for a week or two in Sun Valley or Nantucket seems understandable. However, investors seem to have stayed around the office this Summer. The Crunchbase data above show that the two largest volume weeks for Series C or later financings have come in July and August. LPs take heart, your investors are hard at work…
If you sell to the enterprise and are raising capital, you need a plan for interacting with your key customers during the raise. Potential investors want to talk with a young company’s customers to validate the customer’s intent to keep buying the product or service. However, management lives or dies with its key customers. It needs them for larger future purchase orders and prospective customer references. Asking customers to take prospective investor calls, often from multiple investors, is spending precious relationship capital.
Investors tend to be curious and skeptical types. The questions they ask about how the customer views the capabilities of the team or its products might cause the customer to view the company differently. What happens if the company does not come to terms with an investor? The customer is then wondering about vendor viability if a funding is not announced. The type of investor you want will respect the value of customer time and confidence. However, investors need to do this diligence to assess risk before investing. Managing customer conversations to everyone’s satisfaction is tricky, but we have a few suggestions that have proven helpful.
Industry thought leader Fred Wilson has written recently advocating inside led rounds and assertive monetization of pro rata rights. Fred is delivering fellow early stage VCs graduate-level education on maximizing fund return. However, he is, uncharacteristically, not advocating what may be best for building the company. Once a company is out of development and focused on scaling – moving from $10 million in revenue toward $50 million – an outside lead for the next round makes a lot of sense.
I am biased. I make a living raising growth rounds of capital led by new investors. However, I choose to do this for living because I believe the process is healthy and necessary for growing companies.
Nearly every financing we execute involves a discussion on the benefits of including strategic investors. Taking strategic capital is increasingly a financing alternative. Large tech companies are becoming more active and hiring staff to manage minority investments. We find entrepreneurs often misunderstand the perspective of the corporate investor. We also see early stage VCs who are overly wary of engaging corporate investors. We believe in including strategic investors in a financing process. A thoughtful approach can produce a good outcome. We have also learned that poorly conceived partnerships will become frustrating relationships that create a future distraction.
Follow the suggestions below to increase the odds of success.
Raising the Next Round 