Hot Or Not, The 2021 Venture Capital Market Is Challenging For Founders

The end of 2020 saw the venture capital market in the U.S. booming. These ‘high spirits’ have quickly spread to Europe in early 2021 and the market has gone crazy.

Whether you believe it is a bubble or not is irrelevant. The behavior change is real. Target metrics for funding rounds are being disregarded, ownership percentages are being flexed down, questions are no longer being asked and due diligence is being dispensed with. Many funds are being forced to spray and pray to compete.

Take a recent unremarkable Series A financing. It started at a pre-2021 market standard £10m round on a £40m pre-money valuation, quickly jumping to a £30m round on an £80m pre-money valuation when a couple of funds started competing. Or the start-up which had their seed, Series A and Series B all preempted without any sign of revenue and only the faintest progress with their product. There are daily examples if one cares to browse the virtual corridors of VC Twitter.

For founders fundraising, a market awash with capital and light on probing questions appears to be the perfect combination, but it is more nuanced. Much like a high school dance, it depends on which category your company falls into.

Hot companies

Companies become hot because there are some elements of the founders and what they are doing that attracts the interest of multiple investors and there is a bidding war. This is a great place to be from a founder’s perspective, and, in general, they should take advantage of the current market conditions, but there are risks.

The comparison between a venture capital investment and a marriage is a cliche, but a useful one. Founders today getting swept up in competitive funding rounds with multiple term sheets need to carefully consider whether they want to get to know their partner before signing the papers or hit the wedding chapel with Elvis in Las Vegas. The market is encouraging the latter, but often these shotgun unions do not end well for those involved!

Founders should also be wary about overcapitalizing the company. Used well, capital can help a business hire aggressively and grow exponentially to take market share. But excess cash can also cause a company to become bloated, to hire too quickly, and lose the nimble edge that made it a success before it raised the monster funding round.

Ultimately, founders need to be comfortable that the investors on their cap table will have their backs when the market returns to normality and if things do not go to plan – and this comes down to having built strong individual relationships with each of them.

Not companies

Reading about other companies raising record-breaking preemptive rounds while you are running a more typical fundraising process can be disheartening.

It is important to remember that, although these hot rounds are happening more often, they are still outliers. It is entirely possible to build an amazing business with a normal round (or, without venture capital at all, but that is a whole different discussion).

Stick to the basics.

Avoid common mistakes when approaching investors and in your first pitch and remember that a typical fundraising process takes around 6 months from start to finish.

Ensure you have a good support network both at work and in your personal life to deal with the inevitable rejection along the journey. And in the same way it is good for our mental health to reduce exposure to negative news stories generally, consider limiting your consumption of the constant announcements of big funding rounds.

Nobody knows when this exceptional period of activity will slow, but for now both venture capitalists and founders can at least be united in believing that more companies being funded and new technology being developed is positive for the economy and hopefully the world.

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