A new era of entrepreneurship and venture capital has emerged around the world, driving the high growth of scale-ups and the global economy. This is reflected by the unprecedented year for venture capital in 2021 where we witnessed a record-breaking year of capital raised, a surge of new capital entering the market, and an unprecedented pace of deal making outside of Silicon Valley.  

According to Crunchbase, last year in North America alone, investors put $329.5 billion into startup investments across all stages! That’s a 92 percent increase from 2020 levels, which were already record-setting. This surge in investment was mostly driven by bigger, more competitive deals, and not so much higher deal volume. Strong, disruptive ideas are being fueled by even greater amounts of capital, with the majority stemming from a new band of entrants spending that capital. Last year we witnessed more private equity investors, including asset managers, hedge funds, family offices, corporate venture and others that typically invest in mature private companies, start to compete with traditional VCs by investing more money into startups and at earlier stages, explained here by Pitchbook. Because these nontraditional investors are typically less price-sensitive than their incumbent VC peers, a new generation of scale-ups in overlooked markets attracted the attention of the world’s largest funds, and were increasingly commanding much higher valuations. All of these factors result in making early-stage investing a much more competitive, fast-paced, and higher-priced game for all involved.

As predicted last year, we expect to continue seeing new investment rounds for the best scale-ups that are bigger, faster and more geographically dispersed than ever before. However, what does this mean for high growth founders seeking to fundraise in this new market dynamic? 

Because one of our key roles at Endeavor is to expand and facilitate access to smart capital, we’d like to share a few takeaways from our Growth VC roundtable to help founders navigate today’s fundraising landscape:

VC Panelists Gosia Karas of Softbank Opportunity Fund, Jackie Carmel of Endeavor Catalyst, and Weston Gaddy of Radian Capital sharing with our regional Endeavor entrepreneurs about fundraising at the growth stage in today’s market.

What is your perspective on the VC landscape from now to the next 6-12 months? 

Jackie: “We (Endeavor) truly do believe there’s never been a better time to be an entrepreneur! It’s definitely a founders market, which hasn’t always been the case, and so it’s really positive for entrepreneurship and innovation. Obviously, it’s still a tough journey, but the fact that capital is available for the best companies is really encouraging. The other thing that we’re seeing is that rounds are bigger, they’re happening faster, and are also more global than they’ve ever been. Opportunity is more accessible for everybody, it’s not just on the coast anymore, and that’s exciting for us. At Endeavor, we’ve always believed billion dollar companies can come from anywhere. And that was a little bit of a contrarian viewpoint when Endeavor started 25 years ago, but it’s not the case anymore. We’re seeing this again and again, which is really encouraging.” 

Gosia: “It certainly goes without saying that the market is frothy and the valuations have gone a bit crazy over the last 18 to 24 months. Although this has changed the way our founders approach fundraising, at the end of the day, it is just money searching for yield and there’s a lot of capital driven by the low interest environment that’s looking for high quality investable opportunities.”

Weston: “Something that I think was true a year ago, five years ago, and will be true in five years is this. Raising money should not be a goal. Raising money should be a path to get to where you’re trying to go. I think in this environment, people are increasingly making fundraising the goal, and it is simply a means to an end.”

What market trends and dynamics should entrepreneurs be aware of as they prepare to raise capital in 2022?

Gosia: “From our perspective, it very much feels like every single company out there is raising, and is raising every three to five months. And if they aren’t, they seem to be missing out on getting their valuations up to market. We’ve advised a few of our founders who perhaps haven’t been raising for the past nine months, to consider engaging with investors just for the sake of getting it up to where the market is given the rapid pace of change. At the same time, you can look at it from two schools of thought. From the very fundamental mega trends perspective, it’s a very interesting time to be a founder in technology. And because so much of the GDP is being disrupted by tech, I don’t believe nothing should change because it’s almost like the numbers are catching up to what’s really going on in the world. From the other perspective, I personally think there will be some sort of (market) correction in valuations, likely the moment the interest rate environment changes, that probably will have an impact on the prices that you all are seeing and the investors that throw term sheets at you. But fundamentally, I personally think that the mega trend is stronger. So even if there is a correction, I do think that it should be temporary because the overall mega trend is there.”

Weston: “Obviously there’s lots of reasons to bring your valuation up to market, but to raise money just because it’s been six to 12 months, I think it’s a very dangerous thing from my perspective. Having that become your operating system for your company can lead to a pretty unvirtuous cycle of excess spend and excess valuation. Moreover, the idea that you should raise now because the world’s about to fall apart – I think you should raise opportunistically and grow in a healthy way. Build your company as if you will own it forever, otherwise, you will. 

Jackie: “From a risk / reward profile context, we still believe that it’s there. At Endeavor catalyst we are seeing deals at entry becoming more expensive, but we’re also seeing valuations at exit being higher than they’ve ever been. So we still feel like it’s a great time to be backing entrepreneurs, and as Endeavor, we’re going to keep doing that.”

What are the key criteria, traction, and milestones for successful Series B and growth capital raises?

Weston: “Although I know there’s an article every day on Tiger meeting a company on a Friday and closing on a Monday, understand that that is the exception, not the norm. When coming back to first principles for when you go into a fundraising process, you should expect that it’s not going to be easy and that you’re going to run a real process. Understand the firms that you’re targeting, and why you match their investment criteria. In terms of metrics, I try to steer clear of specific KPIs because you can’t change your business in a couple of months. So to me the question really is, do you gain more from your customers than it cost you to acquire them? That’s ultimately what it breaks down to for most B2B businesses? If you got those dialed in, and you understand them, then I think benchmarks are generally not that helpful.

Jackie: “So as Endeavor Catalyst, when we look at even just a few years ago, we were primarily participating in Series A rounds, just given the stage at which companies were entering Endeavor. Now what we’re seeing, although Endeavors’ criteria hasn’t changed, we’re selecting companies at the scale up phase, and more often than not those companies are coming in having raised these pretty large Series A rounds, prior to getting to that scale up phase. And so what that has translated for Endeavor Catalyst is that more often we’re investing more in the Series B round these days. From a founders perspective, what we’ve noticed is that by the Series B stage, it’s typically not startup funding for most companies. It’s really scale up funding. And so what investors really want to see is repeatable processes. You do need more product market fit revenue, customers, you don’t necessarily need to be profitable. But you really need some predictability about how you’re going to get, you know, this business to work. That’s kind of what we’ve been seeing.”

Gosia: “I totally agree that the later stage you look, the harder it is to be specific about anything. Overall, we try to look for some evidence of growth. For many businesses, this means upwards of the 100% ballpark in year over year growth. For others it’s a little bit lower than that. But if the company is growing, then that is evidence of the fact that the product market fit has already been found. Therefore when I ask myself, do I want to invest in this Series B, I’m not really underwriting the idea anymore. I’m underwriting a business that has already been proven to some extent. From there, I’m making a bet that the business will continue to execute within the niche that it has found, and that it will build a proper machine around it. A lot of it just becomes more qualitative in a certain way.” 

How important is it for entrepreneurs to choose the right investment partners, and what are best practices and reverse due diligence should founders be doing to choose investors?

Weston: This might be a bit contrarian, but I’ll say it anyway. Most investors are going to tell you, they want to get to know you for a long time. I think the idea that you meet investors far in advance and build a relationship, I would have said that a few years ago, but that to me is the thing that has slightly changed. I don’t think it’s not a bad idea. But I don’t know if that gets you what it used to. I also think in terms of determining the right partners, there’s always a question of what you’re optimizing for. It takes a lot of self awareness to step back and think about what’s most important to you. Could be pattern recognition, value added support, or it could just be evaluation. I think really dialing that in and making that a genuine part of the conversation with a partner is more important than anything.

Gosia: I think doing your own valuation exercise is great for founders to run internally. Because really all that it boils down to is understanding some core numbers from your P&L, and looking into public comps from the stock market or similar private companies have been trading on. By having a good sense of what those numbers look like, where the lower ranges and higher ranges, and how that maps to the dilution you want, you’re then able to take in the context of the money that you need to grow your business together to the next milestone. I think this is a really good triangulation exercise that I would encourage entrepreneurs to do. 

Jackie: As for Endeavor catalyst, we’re kind of just along for the ride with the lead investor. And so we’re not kind of actively determining valuations. We have seen them rise across the board, and we’ve also seen instances where a company might be optimizing for valuation, and then in the medium to long term, they’re doing a big disservice to their business. 

Weston: One question that I encourage companies to consider when we’re working with them is to have them flip the terms sheet and valuation scenario around. Let’s say you got some valuation in your head, and then an investor says, you can’t sell the business for less than four times that. Now that scenario might make you step back and say, maybe higher valuation is not always better. There is a balance to this. Remember, our returns math is your problem, whether you like it to be or not. And so founders need to understand what type of return they are onboarding from their investors. Not all capital is created equal, and if you decide to take a certain type of capital from a certain type of partner, you need to just go in with eyes wide open on what are the trade offs. Debt can be great, because that actually doesn’t come with this kind of top down view on what the company needs to be worth. But that’s a lot less flexible capital because once you have one bad quarter, the lenders aren’t gonna say no problem. They view things a little bit differently. And so if your business is more predictable, and you want that optionality, that can be a great answer. If your business is less predictable, and you want a partner who’s totally aligned and you’re willing to shoot for a certain type of outcome, equity can be a better answer. Again, it all gets back to the right valuation should be an output not an input.

The content of this article is summarized from Growth VC Roundtable organized by the Endeavor Midwest team. Endeavor is the world’s leading community of high-impact entrepreneurs. We dream big, scale up, and pay it forward. Follow us on our social media pages to get the latest news on upcoming events and key learnings.