About the last For several years now, VC money has been plentiful and relatively cheap. This created an environment where everyone’s motto became ‘growth at all costs’. Seemingly, the recipe for a successful venture-backed company became a very cookie-cutter one: Raise capital every 18 months; invest heavily in go-to-market; grow sales at a “standard” rate that triples in year one, triples again in year two, and then doubles.
Born of an era of plenty, these “VCisms” have permeated boardrooms and investor meetings everywhere. In fact, the question is, “How long do you expect the raised capital to last?” essentially became a test of intelligence. The only correct answer was 18 to 24 months, without taking into account the company’s specific circumstances.
People may not be saying it out loud yet, but these VCisms are starting to feel outdated. Growth at all costs will not work if capital is not readily available or if it is very expensive from a dilution perspective. And raising capital every 18 months feels really heavy when it no longer takes a month to raise a round, but instead three to six months or more.
It’s time to ask ourselves if these VCisms are still relevant or if it’s time to change. Let’s look back first.
How did we get to a “grow at all costs” mindset?
At present, it is well known that the cost of capital has fallen in recent years. This is usually discussed by reference to the higher valuations companies received at different stages, as shown below in Chart B.
The sooner we start having company-specific conversations and recognize that the recipe for success is not enough, the better for all parties involved.
At all stages, companies saw higher post-money valuations, ranging from about 40% in the earliest stages to more than 200% in growth stages over the period 2018 to 2022, compared to 2012 to 2018.
Put another way, over the past three years, a company was able to raise the same amount of capital for less dilution.
But what isn’t often talked about is the fact that the data shows us that companies haven’t actually raised the same amount of capital. They raised more capital at every stage – significantly more. As Chart C shows, the Series C median has more than doubled in size in recent years compared to the 2012 to 2018 time frame.
Companies saw slightly less dilution on average, as shown in Chart D below.
For example, existing shareholders (seed and Series A investors and founders) saw an average dilution of 22% during subsequent Series B rounds between 2012 and 2018, while their equity was only diluted by about 20% between 2018 and 2022. That’s only a 10% difference.
Notably, companies received more than double the capital for this dilution (ie, $25 million versus $11 million, as reported in Chart C) over the past three years. This capital could be used to drive growth through marketing and hiring salespeople.
If investors saw similar levels of dilution, does that mean they saw similar returns?
Let’s compare the two time periods. Between 2012 and 2018, the median valuation of a Series C company was $120 million. Assuming an investor got 15% ownership in a seed round for a check of about $1 million, then saw their stake dilute in every round after that, the data indicates that after the Series C raise their ownership would be about 7 would be .2%.
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