2014. An interesting year within venture circles to say the least.

From the largest ever M&A of a venture backed company to the rapidly expanding  billion-dollar club to the Micro-VC boom, we saw a little bit of everything last year.

Reflecting back on the year, I wanted to share some thoughts and observations of mine specifically around the early stage financing market. I apologize in advance for the semi-ramble as I’m still working out of my yearly holiday fog.

As always, I’d love to hear other observations/trends people are seeing in the market.

Impact large funds had on the early stage financing landscape. Over the past half-decade, aggregate dollars raised by venture funds have been concentrated across a very small group (~25) of firms in the US. Although companies at the early stage largely remain very capital efficient, large funds that choose to be early stage players (most) must write oversized checks in order to meet reasonable portfolio construction requirements. At scale, it simply doesn’t work any other way. Thus, a typical Series A round from a large firm is more likely to be $10MM-$15MM than $5MM. This hasn’t impacted median/mean A round values that much vs. previous years, but it’ll be interesting to follow whether we’ll experience skew in 2015

Early signs of slowdown within Micro-VC fundraising market. As written about here, the growth within the Micro-VC revolution has been staggering. This wasn’t completely unexpected given the clear funding need/gap between angel financing and venture financing that existed for so many years. The nearly 200 active Micro-VC firms in the US have since filled that gap, and LP’s, appropriately, are now demonstrating massive discretion when placing new bets.

Increased emphasis on relevant and tangible value-add by Micro-VC firms. The profusion of Micro-VC funding options, scaling of crowdfunding platforms, and the relative inability to independently provide meaningful follow-on financing has dramatically reduced the utility of firms that do not consistently provide entrepreneurs demonstrable value through introductions & domain/operational expertise.

An abundance of early/mid stage financing options for companies at all stages of development and a complete irrelevance of round naming. Below are few common forms of financing that I’ve seen at the Seed/Series A level.

– Traditional Series Seed (Angels/Platforms)– 250K-500K; early product, team of 1-3.

– Institutional Seed round (small Micro-VC’s) – $500K-$1.5MM; product in beta, team of 3-5, early signs of product traction visible.

– Late Institutional Seed round (larger Micro-VC’s or firms like Bullpen Capital/Venture51) -$1.5MM-$3.5MM; product typically generating revenue (for SaaS companies, ARR of ~$500K-1MM), team of 5-7, early demonstration of real product market fit.

– Traditional Series A round (Mid-size Venture funds) – $3MM-$6MM. Product/market fit early, but defined, team of ~10.  ARR of $1MM+

– Supersized Series A round (large VC fund) – $8MM-$15MM. Product/market fit defined, team of 15-20, for SaaS companies, ARR run rate of ~$3-5MM.

– Mega A round (large VC funds) – $15MM-$50MM. Significant product traction/customer validation/revenues, teams of 25+, defined market opportunity. These are typically companies that have been around for some time, and have either been bootstrapped effectively and/or have raised several previous seed rounds.

Quality of companies that successfully raised first institutional capital from Micro-VC’s appeared to be higher than in the past. While this is subjective and anecdotal, the following elements provide potential explanations.

– Signs of scaling at funding platforms, allowing companies capital for more progress before raising first institutional capital. Don’t be surprised to see several $1MM+ rounds done through platforms such as AngelList in 2015 (a rational case could be made around these large platform rounds obviating the need altogether for a Micro-VC led institutional round).

– Entrepreneurs are savvier and able to more with less. With the abundance of communities, accelerators, and readily available thought leadership, entrepreneurship isn’t the black box it once was.  And with competition fiercer than ever, standards for all companies have gone up.

– Higher funding bar for Micro-VC firms. Many reasons apply for this including the need to mitigate follow-on financing risk and the fact that optimal demand/supply conditions currently exist.

 

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