Portrait Of A Supergiant
Venture capital is changing.
In recent years, the sheer volume of VCs getting into the market has exploded. And the volumes of capital being thrown around are getting bigger. Much bigger.
Crunchbase recently put out an article taking readers “Inside The Rise And Reign Of Supergiant Venture Capital Rounds”. This was the first time I’d come across the word “supergiant”, but it aptly describes the sheer scale of the deals we’re seeing in the world of tech investing.
$100 million plus funding rounds were once unheard of. Now they’re commonplace. At the start of 2017 these monster deals accounted for 35% of global investment volume. A year later, they account for a whopping 61% of equity funding into private technology companies. And perhaps the most interesting thing about this trend is that the bulk of the money is going into a small group of high profile companies. Names like WeWork, Uber, FlipKart and SoFi.
One key factor is driving this trend. SWFs and other big institutional investors with deep pockets have started to make strategic investments in technology in order to diversify away from public markets. They’re committing huge sums, both directly and via outsourced investments in large venture funds. Saudi Arabia is one example, China another. There are countless more.
The rise of these “mega funds” is creating rampant competition for access to the best deals on the best terms. High profile founders feel empowered to demand higher minimum commitments from investors, upscaling rounds in the process.
We live in an era when private companies are in the ascendancy. They seem to capture everyone’s attention and imagination. They are fast-moving and agile. They have visionary founders who are not beholden to the prosaic whims of stakeholders. And they are stuffed to the gills with investment capital.
In fact, private companies are so prevalent nowadays that founders are actively looking for ways to take public companies private, as demonstrated by the recent Tesla storm. This is self-reinforcing. Private companies with access to liquidity via the venture community don’t feel the need to go public, and therefore elude the scrutiny of investors, analysts and the wider market. This, in turn, gives them the freedom to continue raising at seemingly exponential valuations. In fact, some of the supergiant rounds we’ve been seeing are larger than one might expect of a traditional IPO!
Indeed, the numbers are eye-watering. In June 2017, real estate platform Compass raised $500 million from SoftBank Vision Fund and Sinai Ventures. In August 2017, WeWork raised $4.4 billion via SoftBank. And in January 2018, construction company Katerra raised $865 million via SoftBank, Canada Pension Plan Investment Board, Soros Fund Management and others, valuing the company at upwards of $3 billion.
One name keeps cropping up. Softbank. The huge firepower of Masayoshi Son’s investment fund cannot be ignored when considering the rise of supergiant funding round. The Japanese telecommunications corporation announced its $100 billion tech-focused Vision Fund in late 2016 and it’s been on a spending spree ever since. Last year, it was involved in more than half of the top ten biggest investments in VC-backed startups and is rumoured to have committed around half of its $100 billion fund. It crops up in the biggest deals and undoubtedly has an inflationary impact on the broader venture landscape. Some VCs are even starting to question whether Softbank is fueling a bubble in tech valuations.
Fintech has benefited from the trend towards institutional players entering the startup arena. Indeed, US insurtech startup Oscar enjoyed the largest US funding round in the first quarter of 2018. As our sector matures and desrisks, I expect it to attract even more attention from mega funds like Softbank.
The rise of supergiant funding rounds is certainly interesting, but the media’s obsession with this new phenomenon obscures a more pervasive and important truth. Progress is driven by the long tail of startups and entrepreneurs, many of whom don’t have access to large amounts of capital. The quality of a business is not determined by the size of its runway. Rather, it’s a product of the quality of the team and its ability to reach, engage and help customers. That’s our focus here at Origin, and it always will be.