New Q3 ‘24 Funding Data
This week we discuss preliminary Q3 funding data, different Seed fund models, and bootstrapping versus raising venture capital.
Greetings! We got our first taste of cooler weather and are finally feeling it’s appropriate to top our coffee with as much pumpkin spice cold foam as possible.
✂️ First Cut—State of Private Markets: Q3 2024
Carta released their preliminary Q3 2024 funding data, focused on valuations and amounts raised at different stages. Trends in cash raised and valuations are inconsistent across stages. Seed, Series A, and Series C median valuations and cash raised are the highest they’ve been this year, while Series B and D fell relative to Q3.
STV Take: Median cash raised at the Seed stage is the highest it’s been since Q2 2022 and median valuations are the highest they’ve been in recent memory. As we have mentioned multiple times before, the companies that are successfully raising are raising large amounts of capital at higher valuations. This is likely still being driven by the “hot or not” phenomenon where companies with notable founders and/or early signals of significant market opportunity are able to run competitive fundraising processes. The flight to perceived quality persists.
Additionally, as it continues to take longer to reach Series A milestones, raising larger Seed rounds can actually appear smart. It gives founders longer runways before they need to raise more capital and provides a buffer for when things don’t go as planned. That said, it will be interesting to see what becomes of the companies raising these larger Seed rounds. What happens if they don’t hit Series A milestones? Will they be able to raise more Seed capital or will they wash out sooner than the current cohort of later-stage Seed companies that have failed to break through the Seed Crust? Much longer term, how does this impact returns for Seed-stage funds deploying capital right now? As usual, looking at this data gives me more questions than answers.
🧭 A Guide to Optimizing Financial Performance
AVL Growth Partners released a new guide that highlights the key three financial drivers of a startup, along with recommendations to help founders avoid common financial modeling pitfalls and the best way to project business growth. A few of the common mistakes AVL Growth discusses in this guide include:
Overestimating attainable revenue
Misunderstanding how quickly revenue can grow related to COGs
Underestimating customer acquisition cost
STV Take: Investors understand that a company’s revenue expectations and growth projections presented in a pro forma are educated guesses at best and shots in the dark at worst. Investors can sniff out the latter. While uncertainty is inevitable regarding early revenue growth, there are techniques and best practices founders can use to generate a solid understanding of their cost drivers and present realistic expectations for potential revenue growth. AVL Growth’s latest guide offers valuable tips to help founders craft the best version of their pro forma. (Sponsored)
🤔 Seed Investor Biases & Incentives
I came across a TechCrunch article from Jonathan Lehr, a partner at Work-Bench, that discusses the various motivations and support across different models of Seed-stage firms. The chart below is a nice summary of the main differences.
STV Take: Jonathan does a great job of discussing the potential ramifications at the Series A stage of accepting funds from different Seed groups. For instance, he highlights the risk of a multi-stage firm investing in a company’s Seed round but then opting out of subsequent rounds, which can send a negative signal to potential new investors. Existing investors are aware of the company's performance and the management team's capabilities. If a multi-stage fund—known for treating Seed investments as option calls for future rounds—decides not to invest, the perception is they have insider knowledge that something is amiss with the company.
One area where I have a differing opinion from Jonathan is in the return expectations for concentrated Seed investors. While I agree that concentrated investors require a higher ownership percentage than high-volume Seed investors, I’m not convinced that all are underwriting solely for a 10x return. Given the generally binary (power law) outcomes in venture capital, the Seed-stage VCs I know are primarily focused on potentially massive markets that can support companies capable of achieving 100x returns on their investments.
🎧 Bootstrap or Raise Venture Capital?
The Y Combinator Startup Podcast hosted an episode that discusses whether founders should raise venture capital or bootstrap. The co-hosts, Dalton Caldwell and Michael Seibel, launch the conversation around the premise that most businesses are not venture-backable businesses. The discussion then segues into what is and isn’t a good fit for venture capital. The point of venture capital is to pour accelerant onto something with the potential to grow very big. If there isn’t that potential, then venture capital doesn’t make sense. Additionally, raising venture capital isn’t a one-time decision. Founders can choose to build without external funding and later decide to raise capital if they believe it could propel their business forward.
“You can try really hard, but if the result isn’t a lot of money, I shouldn't logically give you money now. Not because I don't like you, or because you're not a great person, or these users you're trying to serve aren't great, it's just because it's not a good business transaction. It's literally nothing personal.”
— Dalton Caldwell
STV Take: There are two points in this podcast that the co-hosts rightfully harp on. The first is that an investment decision is not personal; it is just a business decision. While it’s hard not to take rejection personally, I think the framing of an investment as a pure business transaction where investors just want lots of money in return helps depersonalize the experience.
The second point is that there is no shame in bootstrapping a business or starting a business that isn’t venture backable. Not raising venture dollars doesn’t mean that the business can’t have a material impact on customers, or being frank, make founders a lot of money. This podcast is an excellent reminder that success is defined differently by everyone and founders should build the business they want to build and not what investors or the media glorify.