A Booming Startup Market Prompts an Investment Rush for Ever-Younger Companies

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Investors poured a record $93 billion into early-stage US startups by December 15 in 2021, tripling the amount five years ago.

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“We live in a world where capital is available,” said Mr. Menda, a 29-year-old former venture capitalist who co-founded The Coffee Company in 2020 with Issam Freeha. He added that fundraising was “much easier than it used to be”, he said.

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Over the past year, there has been a notable rush of funding to the high-risk category of early-stage startups, as investors struggle to get into companies even before they have employees or products. While the startup sector has been brimming with increasing amounts of cash over the past decade, much of it has traditionally gone to late-stage private companies that have tested business models.

In 2021 investors invested $93 billion in so-called seed-stage and early-stage startups in the US by December 15, a record. That amount compared to $52 billion for 2020 and $30 billion in 2016, according to Pitchbook Data Inc.

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With more money coming in—and the number of new venture-funded startups relatively flat—values ​​have increased. According to Pitchbook, seed and early-stage companies funded had an average valuation of $26 million in 2021, up from $16 million in 2020 and $13 million in 2016.

Investors betting on the space say they see a lot of room for startups to grow. They’re excited because many venture firms are posting their best returns since the dot-com boom, thanks to a thriving software sector and billions of dollars in profits at companies like Snowflake. Inc.

and doordash Inc.

The combined valuation of private startups globally has risen into the trillions of dollars – becoming a huge investment category.

The current rush of capital has warned some prominent investors that the market is heating up. Anger among Silicon Valley insiders about rising startup valuations is nothing new, but the willingness to air those concerns is noteworthy.

Fred Wilson, Union Square Ventures partner and early Twitter supporter Inc.

and Coinbase Global Inc.,

said In a November blog post He had seen a few rounds of investment in which companies were valued at $100 million before they had a sustainable business model.

“They are delusional, comforted by the possibility that someone will come along and pay a higher price in the next round,” he said of investors. “The numbers just don’t add up.”

Sam Altman, former president of startup incubator Y Combinator—which has backed hits like DoorDash and Airbnb Inc.

-Predicted In a December tweet Venture capital returns in this decade are “going to be much worse than in 2010.”

To compete, many venture capitalists say they spend less time on background checks and other research before investing. Investors are especially on edge in the recent round of high-growth tech stocks, as startup trends often follow the public markets.

Traditional venture companies are increasingly raising new funds, while hedge funds and private-equity investors have moved into the market. Most of the hedge fund’s money is aimed at later-stage startups, but the crowded field has prompted other investors to seek out earlier-stage companies.

According to PitchBook, New York-based hedge fund and startup investor Tiger Global has participated in more than 340 startup investment rounds in 2021, up from 78 in the previous year. A few years ago, the most prolific investors usually made a few dozen such investments.

Among Tiger Global’s investments is Blank Street, which has ambitious growth plans but involves more physical construction than tech investors often prefer. Mr. Menda, CEO of Blank Street, says the company’s no-frills approach gives him strong profit margins for his stores, and that annual revenue has quadrupled since he raised money in September.

Mr Menda said its business model was modeled after a group of Asian businesses, including Indonesia’s Kopi Kenangan and China’s Luckin Coffee. Inc.,

Which pioneered a similar approach of attracting customers with apps that promote low-cost drinks and deals.

But, by far the most prominent in that group, presents a difficult comparison. The company, which at one time planned to overtake Starbucks Corporation

In China, 2020 saw its share price drop more than 95% after it told investors that $310 million of 2019 sales were fabricated by employees. But it reached a settlement with the US Securities and Exchange Commission over claims of accounting fraud, which it neither accepted nor denied.

Venture-capital investors often shy away from an area when its best-known company faces such a fall from grace, but that hasn’t been the case with coffee startups. Luckin’s business has held up — it posted rapid growth in its latest quarter and its stock has recovered some of its losses.

Mr Menda said that but given its management problems, it does not compare well with Blank Street. Instead, the company looks to several other grab-and-go coffee chains that have been able to raise funds recently and grow rapidly, including Copay.

Multiple rounds of funding at a busy company today could be coming in just a few weeks, especially in areas where investors are as hot as cryptocurrency or corporate credit cards. In more calm times, venture capitalists often encourage companies to raise every nine to 18 months.

Mark Suster, a partner at Los Angeles-based Upfront Ventures, said that in mid-2010 he saw that the average early-stage company was valued at about $15 million, compared to around $25 million today—and companies often haven’t generated yet. There is revenue.

As for optimization, he makes “early bets, first,” based largely on the ability of the founders and the quality of the product, rather than some of the initial hires, he said.

“I used to be able to wait nine months. I could see how your customers use your product,” he said. Now, “I’m really backing talent, then over time, I’ll figure out if you can execute.”

Others are turning to more unconventional bets.

In September, startup Colossal Inc. raised more than $16 million for its plan to return the woolly mammoth as a species in the wild – by modifying the genome of the Asian elephant to make the animals look and act like the woolly mammoth.

The company’s CEO, Ben Lam, said a business plan like Jurassic Park primarily focused on making money from new technology. But Colossal also told investors in 2020 that there was the potential for “huge park attractions” among other potential revenue sources, according to the slide presentation.

Mr. Lam said the company is only set to raise $8 million before demand exceeds expectations.

He said, ‘It was the right time. “People’s thinking and attitude were in the right place and on the right scale.”

Write Elliot Brown at [email protected]

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