What is Up With These Mega Rounds? Making Sense Of The Startup Market

$530M round: Snyk snags another $530M as valuation rises to $8.5B

$400M round: Cityblock Health raises another mega-round of funding, tipping its valuation over $5 billion

$130M round: TrueLayer raises mega-round as open banking heats up

These were just a random sample of recent headlines when googling for “mega round startup.” Much has been written and said about the market lately, this post is how we are trying to make sense. With due caveat that this is not an exhaustive analysis but a short summary of our opinion.

1) What is The Mega Round -- While there is no definition of mega round, the consensus is it is $100M+. Tau segments mega rounds further -- for us there is a subcategory for companies raising at >100x ARR. It’s the mega rounds that are driving the increase in venture dollars, for instance Q1 2021 had more than double the money of Q2 ’19 but less number of deals.

2) Where Is The Money Coming From -- The line between non-traditional VCs and large VC funds is increasingly blurry. If a hedge fund with $100B in assets is putting 10% into venture capital, how do you classify them? If a VC raised a new fund of $3B putting half of it into private equity, how do you classify them? What about ICOs and SPACs? Roughly speaking though, what we are seeing is that other kinds of firms like hedge funds and private equity are investing ever more in startups. In traditional VC the $1B fund was unheard of 10 years ago, now it’s practically a benchmark for the very large firms. The challenge is what we call the law of large numbers -- it’s much harder to get to a 5x with a $1B fund than with a $100M fund.

3) Why Is There So Much Money -- We have been reconciling the following facts:

• 1/3 of small businesses are at high risk of shutting down because of the ongoing pandemic
• Unemployment has dropped but still 50% higher than pre-pandemic
• The stock market is booming, some say greatly driven by tech

But it does explain partly why there is much inflow into tech startups -- physical presence is less of an obstacle and startups are arguably the best shot at generating 10x. Anecdotally, we have indeed come across multiple companies with 3 or 4 or $5M in revenues raising at a billion or more in valuation. Bubble you say? If you are asking then you have already answered the question. From a purely economic view, bubbles are not a bad thing but they come with deep social consequences -- a much larger debate and something we absolutely need to address.

4) How Early-Stage VCs Are Reacting -- The graph below is the median deal size of VC-backed companies worldwide, showing a 25% jump in valuations in 2020.

For small funds this is mostly good news. In our experience the increase has been especially after product-market fit, which is obviously a plus for those focused on seed aka the round before that. Our worry is not that this trend isn’t sustainable long-term (it is not), it’s that it crashes suddenly rather than deflates slowly. We are betting on the latter. Not because “this time is different” (the nuances always are) but because what matters to us in 90% of our portfolio is the trajectory up to series B / C, whereupon larger firms will have taken our place. Valuations at those stages can remain strong or fall more gently than public markets. Our view is also colored by an expectation of continuous inflows of money into the US economy.

5) How It Is Affecting Early Stage Entrepreneurs -- A rising tide lifts all boats and we are indeed seeing seeds and pre seeds getting more expensive. For instance two cofounders with a Powerpoint raising $2M at a $20M cap would been unheard of a couple years ago. At Tau we fully recognize that round sizes and valuations will go up over time, the concern is that standard norms are out of whack right now. Seed used to be 20-30% dilution, as did A, we are now seeing companies expecting 10-15%. We don’t know if this is a permanent change but what does get us excited is more startups getting created since being an entrepreneur is economically very favorable right now.

Originally published on “Data Driven Investor," am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr -- good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.