Inside the Smart Game of Late Fundraising Rounds
It used to be the walk of shame: startups raising Series D, E and even later rounds of investment. This was usually an indication that things weren’t going as planned or that the window for a substantial acquisition or IPO had shut for macroeconomic reasons. While the letters associated with a round of private capital are somewhat arbitrary, the deeper you went into the alphabet, the more questions were asked about whether you had a viable business.
This is no longer the case. Today, mega-rounds of late-stage capital are common, driven by companies that are choosing to stay private longer. According to the National Venture Capital Association, the median time for venture-backed startups to exit more than doubled from 3.1 years in 2000 to 7.4 years in 2013.
Companies such as Airbnb, Dropbox and Uber have raised staggering amounts of capital in later rounds, eclipsing $1 billion in some cases. A decade ago, venture-backed companies would have been ecstatic to achieve a $1 billion valuation and cash out; now there are so many so-called “unicorns” that the private capital markets have adapted to tame the herd.
There are three major reasons for this new dynamic. First is the astonishing amount of capital available today in the private markets. Founders who were once in a race to get to a liquidity event such as a buyout or IPO now have viable options for continuing to add value beyond a Series B or C. Private investors also offer a more efficient transaction than going public and are more likely to offer lucrative valuations based on potential, vs. actual, performance.
Second, acquisitions are often better deals than going public. As tech companies like Facebook and Google become larger and spend billions to acquire hot new properties, the prices have gone up. On top of that, synergistic benefits that could be recognized by the acquirer might not translate to public markets. To wit: Facebook’s $1 billion acquisition of pre-revenue Instagram in 2012. While it was a brilliant farsighted move for Facebook, would a NASDAQ analyst have agreed on that pricing? Probably not.
Finally, IPOs and acquisitions are no longer the only liquidity games in town. Investors and employees who previously worried about how to realize their gains from selling equity can now do so with innovative financial restructuring if the company plans to stay private. These liquidity alternatives are becoming increasingly common among the unicorn companies and are on pace to form an entire market of their own.
So if you see a startup raising a Series D or E, take another look. While later rounds used to signal that things weren’t going as planned, now they often are the plan.