The unprecedented liquidity that has entered the venture market in the past year has spurred several trends that require VCs to adapt to a more competitive environment where startup founders have far more leverage than they did in the past.
Structurally, there are only so many startups looking to raise capital, and even though some founders may be opportunistically pursuing deals they wouldn’t have previously, the supply of capital into venture funds has nonetheless outpaced the demand for those dollars.
This means VCs are in an unusual environment of increasing competition to get in on deals with startups, and as they jockey to win spots on cap tables they’re moving faster than ever to close deals.
The best early-stage VCs take the time to find the founders they believe in and who need their expertise, because they’ll be right there working with them for the long haul.
What’s more, newcomers in the VC market like Tiger Global as well as a number of non-VC investment funds like PE firms with much larger pools of capital than the market has seen are aggressively pursuing enormous deals in an effort to drive faster exits and returns on their investments.
With so many investors vying for their attention, many founders are taking the opportunity to raise bigger rounds and coming back for additional funding faster than ever, which is apparent in the constant drumbeat of funding news as well as the 250 unicorns and the record $288 billion invested in startups in the first half of this year.
How can VCs adapt and be competitive?
For some, the answer may be moving faster to get in on deals. Strategies like doing more due diligence in advance of ever meeting startups and leveraging technologies like AI to supplement investors’ ability to evaluate companies can help with this. For others, it may be making larger investments and accepting smaller ownership stakes in startups than they’re accustomed to.