Market research firm Pitchbook recently found that global venture capital investment is at an all-time high of $142B.
But there’s a catch: fewer and fewer startups are getting funded — and the successful ones are raking in way more early-stage $$$ than they used to.
Since 2012, the median seed round deal has doubled from $500k to $1m — and this year, 8 companies have raised rounds of $500m+.
We haven’t seen this much money flowing since…
Between 1997 and 2001, internet technology “went from a luxury to a necessity” — and internet businesses (AKA “dot-coms”) experienced unprecedented growth.
At the peak of this boom, venture capitalists began to favor hype and “innovation” over hard numbers — and investors threw cash at anything with a URL.
The bubble popped because these investors: 1) Used metrics that ignored cash flow, and 2) Overvalued companies by pumping them with obscene amounts of money.
VCs are injecting huge sums of cash into companies at earlier and earlier stages. It’s like NBA scouts recruiting 5th graders.
The result is investors making increasingly risky bets on start-ups, based on very little evidence that they’ll be sustainable money-makers.
It’s similar to what we saw play out 2 decades ago: everyone wants a piece of the action — and as a result, valuations are speculative (at $69B, Uber is valued around 10x its revenue).
This isn’t to say today’s VCs are operating with sails to the wind: some have argued that investors are operating more cautiously because they’re acutely aware of the past.
But what this really means is that they are hedging larger bets on a smaller pool of companies — most of which are still in diapers.
And contrary to the early-stage investment “success porn” that’s infiltrated the entrepreneurial corners of the internet, that’s rarely a smart move.