Investors want bigger bets, but the exits remain scarce

Matt Ober is a managing partner at Social Leverage. Matt was most recently the chief data scientist at Third Point, where he built the data analytics and technology platform used to enhance the firm’s investment capabilities in equity, structured credit, venture capital and cryptocurrency.

Venture investors are concentrating their money in startups capable of producing enormous returns. That is making it harder to fund solid businesses with more modest ambitions, even as the market struggles to deliver enough multibillion-dollar exits.

A higher bar for fundraising

In venture capital, many startups are gearing up for the fall fundraising season. Decks and data rooms are ready, VCs are back from summer vacation, conferences are kicking off, and countless companies are going out for a raise.

But the bar is higher than ever.

Five-times growth is the new three-times growth. Three-times growth is great, but not for the best of the best. Five million dollars in revenue is the new minimum for a Series A, where $1 million previously might have been enough.

If you haven’t figured out how to grow at speed and, in many cases, don’t have a clear line of sight to $100 million in revenue, many VC investors will come off your list.

Crazy? Sad? Honestly, it’s just the truth about the world we are living in.

Former Sequoia Capital partner Doug Leone has described asking himself three questions before making an investment: Would he put his children’s money into it? If he could make only 20 investments in his life, would this be one of them? And could the investment return the entire fund?

That thinking reflects how venture capital has become concentrated around a relatively small number of companies with the potential to produce extraordinary returns.

In other words, investors are looking for moonshots: companies with the potential to become so large that a single investment can return an entire fund.

The missing middle

There is a real gap in the market for investors willing to back companies that aren’t aiming to become the next trillion-dollar business. These companies may never go public but could still build sustainable businesses and eventually be acquired.

Founders building them need to be scrappier than ever. They also need to remain in fundraising and selling mode nonstop: always raising, always building their fundraising network and always remembering that sales solve everything.

The tension is that investors increasingly expect enormous outcomes from their portfolio companies, while exits of that size remain rare.

Where are the big exits?

The data sector is one example. It needs a multibillion-dollar exit.

The last great exit of real size was arguably SNL Financial, which S&P Global acquired for approximately $2.2 billion in 2015. More recently, Tegus and Visible Alpha have been acquired, but neither transaction reached multibillion-dollar status.

Now, Carlyle-backed YipitData is reportedly exploring a sale that could value the company at more than $2.5 billion. If a deal happens at that valuation, it would provide the kind of large outcome the data sector has been waiting for.

Data has been called the new oil and the new gold. Now we’ll see whether it can produce the multibillion-dollar exits that today’s venture capital model increasingly demands.