What the VC boom means for early stage investing

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Venture capital investing has been on a tear. In 2021, a record $330 billion poured into promising tech startups around the country across all funding stages. The massive influx of venture capital is not only creating more competition among investors seeking favorable deals, it is creating opportunities for entrepreneurs to expand their funding rounds at more attractive valuations.

According to PitchBook, the median valuation for U.S. seed-stage investments in 2021 exceeded $9 million, more than double what it was a decade ago. Similarly, the median size of a seed round has also doubled over the past decade to nearly $3 million. In short, seed-stage funding rounds are bigger and reflect higher valuations than ever. Even as world events create economic volatility, with so much capital available and so many technology-driven opportunities to innovate, the decade-long climb in investing activity is not likely to lose long-term momentum.

So, what is driving these trends, and what does it mean for investors? To start, in a low-interest-rate environment, the potential upside of venture capital investing is enticing, particularly as venture-backed success stories are daily news. As digital transformation accelerates and redefines business processes, analytics and operations, almost every industry is seeing the impact of venture-backed, tech-driven startups.

Additionally, the rapid maturation of technologies such as artificial intelligence, 5G, augmented reality and big data processing creates more powerful solutions to industry pain points and allows startups to develop and implement solutions faster and more cost effectively. With more venture capital available and an increasing appetite to deploy it, the most promising tech companies are emerging faster and going further with every dollar they raise.

With increased competition, venture investors miss out on great deals because the opportunity passed before they were aware of it, or a lead investor’s syndicate filled the funding round. So, rather than miss the next opportunity, investors are opting to assume additional risk and get in earlier. As a result, capital is cascading down from later stage to early stage and seed round deals.

From an entrepreneur’s perspective, this is good news. Capital efficient, young tech businesses with a compelling value proposition can extend their operational runways longer by attracting larger amounts of investment capital at valuations that are not overly dilutive. And to remain competitive in early stage investing, winning in the market is tied to syndication.

Having a network of institutional, angel or corporate partners to co-invest in early stage venture rounds can create competitive terms with sufficient capital to compete for early stage rounds. Further, these investment partners bring essential resources and connections such as customer access, industry expertise and/or additional funding that create tremendous value beyond the size of the checks they write.

While not as bullish as on the coasts, seed-stage round size and valuations have been trending up in our region. JumpStart’s investing approach has morphed in response to these market dynamics. Whereas syndicated rounds of seed investment were once the exception, today they are practically a necessity and include investment partners that reflect each deal’s technology, market vertical and domain expertise.

With more investors of all types seeking access to venture investing opportunities, opportunities are increasing for broader participation to compete for deals. When the right investors connect on the right opportunity with the right amount of capital, it sets investors, founders and the region up for success. ●

Jerry Frantz is President of JumpStart Ventures

Jerry Frantz

President
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