Blogocentric Formulations

This Just In - August 14

100 Million Was Once Big Money for a Start Up. Now, It's Common  
Written as part of "This Just In..."   for "Blog Harbor from The Talent Pond" 

This article blew my mind. When I think of venture capitalism, I still (apparently naively) imagine the deals like we see on Shark Tank every week. An enterprising entrepreneur has a good idea and some investor comes along and offers them $100,000 for 20% of the company. Or, once the venture has a proven track record of success, maybe it even goes as high as a few million dollars for a smaller percentage of the company. I truly had no idea that these "mega-rounds" of financing (those that raise over $100 million) existed with any degree of regularity, let alone were so prevalent. It's truly crazy to think that through July of this year, there have been a whopping 268 mega-rounds of financing secured. That's well over $26.8 billion (with a B) worth of investment in startup companies so far this year! The article notes that these mega-rounds are occurring with such frequency now that the industry is considering redefining the term to only include investment rounds that top $200 million.

That's a pretty far cry from my modest little fantasy of coming up with a cool product and having some investor be like, "Yeah, I'll give you a million bucks to get this venture off the ground!" Apparently I should be aiming much, much higher!

What this article really got me thinking about, though, is what that kind of money means for a startup. As noted philosopher rapper Notorious B.I.G. once said, "Mo money, mo problems" and I think that characterization is apt here. Sure, having $100 million in seed money will ensure your company at least has a reasonable opportunity for success. Depending on the type of business you're operating, that could keep you in the black for years and years while you find your footing in the market. But at what cost? I'd be willing to bet that someone investing nine figures in your new company probably isn't going to be satisfied with, say, 10% ownership. I'd be willing to bet those bids come with significant strings, like controlling interest... if not in equity then at least in seats on the board of directors. Similarly, I'd also be willing to bet that an investor pouring that much money into a venture is probably going to be much more hands-on in terms of checking on their investment: more reporting, more meetings, more input on how the company moves forward.

On the other hand, having access to that kind of capital comes with a lot of advantages. As the article notes, startups with that kind of cash can afford to hire better, more desirable candidates with competitive salaries. The company itself can explore different marketing strategies, including operating at a calculated loss early on in order to build brand awareness and loyalty. And your employees don't have to spend so much time worrying about the health of the organization or its ability to endure if you know you're fully funded for the next 12-24+ months.

The other interesting aspect to this is that investors seem to have all but given up on worrying about another bubble. When the tech bubble (along with the real estate bubble) burst in the 2000s, investors became wary of putting a lot of money into companies after watching several of them skyrocket up to market valuations of over $1 billion and then crater in a matter of weeks. That sense of wariness seems to have completely abandoned a lot of investors. For example, Tencent Holdings (China's approximate equivalent to Google), has already participated in more than 30 mega-rounds in 2018. For those of you keeping score at home, that means Tencent has, in the first half of this year alone, spent more than $3 billion investing in unproven startups.

It'll be interesting to see how this current flurry of investing activity plays out. Maybe it'll create a whole new era of corporate growth and affluence, anchored by remarkable advancements in technology. Then again, maybe the bubble will burst again and these investors will be out the massive amounts of money they invested. I guess only time will tell. Until then... I have a great idea for a company. Does anyone know who I need to call to get the ball rolling on them sending me $100+ million dollars?