Lauren Loktev, Collaborative Fund Partner, On the Current State of VC Investing.

Part of  Cooley, LLP on the State Of Venture Capital In Q3 2017

Our Cooley boilerplate:

Cooley is one of the big dogs of the VC legal eagle biz. Something like a third of the unicorns on the WSJ's Billion Dollar Startup Club list have used Cooley for one purpose or another.
Additionally, 20 or 21 of the companies on the "Technology Review's 50 Smartest Companies 2017" list have been represented or counseled by the firm. As I said, one of the biggies.

Q3 2017 Quarterly VC Update: Lauren Loktev on the State of Venture Capital Investing

A few highlights from Lauren:

On dealflow: This year, Collaborative has seen a continuation of healthy capital flow, a surplus of competition among VCs for what are perceived to be the best deals and, generally, an uptick in valuations across rounds.

On social impact: We truly believe that paying attention to social impact and having strong values and a message around moving the world forward is a competitive edge – both for businesses as well as for investors.

On Collaborative’s year: I’d say a typical case for us is making an investment every six weeks or so, and that has been consistent in 2017. I anticipate this trend to continue in 2018.

On shifting consumer behavior: Consumers are increasingly demanding products with great stories and ones that fundamentally align with their values.

Cooley Q3 VFR data indicates there has been a continued climb in median pre-money valuations across all deal stages. Added to the fact that this still seems to be a robust financing environment, based on yours and Collaborative’s experience, what are your thoughts on the data? Similar, different? Any particular views on the environment, especially from an early stage investor perspective?

Our experience has certainly matched what’s coming through in Cooley’s data. In Q4 of 2015 through Q1 of 2016, many people thought we might be seeing the top of the market and the start of a decline. It felt like there was a real pull back in terms of number of deals closing, valuation and, to some degree, round size. Generally, there was the feeling that people were starting to become a bit more bearish on the market and that those dynamics would continue.

Around that same time, many very large funds were raised. This was coincidentally the biggest quarter for VC fundraising (at a fund level, raising from LPs). So the market quickly corrected out of that phase, and it felt like by the time that we hit the end of 2016, we were getting back to where we had been before that slight softening.

This year, Collaborative has seen a continuation of healthy capital flow, a surplus of competition among VCs for what are perceived to be the best deals and, generally, an uptick in valuations across rounds.

One trend that may not perfectly come through the data, just from looking at the pre-money valuations, is that while valuations are certainly increasing at the seed level, at the same time, round sizes are also increasing. I think part of this trend stems from the fact that more traction is now required for a Series A. In some ways, seeds are now what might have been called Series As a number of years ago, and on and on through the capital stack. Therefore, many more seed rounds are being done at the $3 million dollar round size, which is much larger than we have previously seen. We have also noticed multiple companies for which it is in their interest to raise sufficient capital so that they can get to significant proof points before their Series A – mainly to ensure they have sufficient runway to reach that higher bar. I think, overall, companies that are successfully raising a Series A are probably farther along from a revenue and growth perspective than historical Series A companies.

How are you feeling about valuations? Any nerves?
Yes and no. I think that we’re going to see fluctuations in the market such as these, and that’s just the nature of investing cycles. It forces us to be more thoughtful and disciplined, and to hunt where others aren’t. The main thing that concerns me in this market is that having a lot of capital generally doesn’t encourage strong business fundamentals. I tend to believe that if a company has too much money, it can actually hurt them. There’s a level of feeling capital constrained that can actually push a business to be more nimble and to build that business in a smarter way....

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