After two years of record round sizes and results, you might be forgiven for assuming that venture capital is a founders’ market today if you read mainstream tech media. This is partially true: venture capital had its best year in 2021, more than tripling from 2020, which was already a record year for investment. In 2021, about 400 new startups exceeded a $1 billion valuation, bringing the total number of unicorns to 69 percent in just a year.
There are several examples of large rounds materializing swiftly for firms in their early stages. Wing VC, which records financings by Silicon Valley’s most “elite” VC funds, finds that the median Series A financing increased by 38%, and the accompanying pre-money value increased by 71%, both of which are off prior record highs set in 2020. But there’s another story underneath the headlines: higher values come with a lot more variation across firms. As Elizabeth Yin of Hustle Fund recently tweeted, round sizes and valuations have diverged for all firms, rather than growing uniformly.
This is consistent with my experience investing in firms created by women, the majority of whom were first-time entrepreneurs unfamiliar with traditional venture capital. I meet 20 excellent startups who hustle for months and can’t raise a cent for every story I hear about a large round that came together in two weeks. Before contemplating pre-seed financing, a fund is known for guiding large rounds in pre-revenue, pre-launch, and pre-everything firms advised a founder in my portfolio that she needed to generate $1 million in yearly sales.
The founders’ backgrounds are so disparate that they may be from separate planets. Experienced, pedigreed, smooth, or well-connected founders — or some mix of these — dwell on “World Flush,” a planet of huge, buzzy, competitive early rounds. Outsider founders, who don’t fit the mold and aren’t connected to sources of funding, live in a world where fundraising is exceedingly tough and improbable, needing incredibly gritty execution just to survive. “Planet Scrappy,” we’ll call it. To state the obvious, investment behavior in Planet Flush and Planet Scrappy is entirely different. Investors in Planet Flush are comfortable betting on the magnitude of the market and the perceived caliber of the entrepreneurs in the early phases when there is no real traction to analyze.