Venture Capital

The Exploding VC Ecosystem is Attracting New Investors and Speeding up the Path to IPO

By Max Altschuler

Even as so much of the economy struggled throughout last year, startups managed to see impressive overall growth. Global venture funding was up 4% over the previous year, reaching $300 billion, Crunchbase reported. But activity in the startup space throughout 2021 has already left those figures in the dust.

“Startups have never had it so good,” TechCrunch declared this summer. Startup funding exceeded $156 billion in the second quarter alone, up 157% year over year, according to data collected by CB Insights.

Take a closer look at what’s happening, and you find that the money pouring into the startup ecosystem isn’t just fueling the rise of new companies. It’s also likely to substantially shorten the path startups take from founding to potential IPO, and with much higher valuations than ever before.

Multiple factors are contributing to the flush VC market. For starters, successful IPOs of recent years have given VC firms lots of cash, which they’re looking to reinvest. Firms that have traditionally invested at a later stage or post IPO have also been attracted to the space, eager to get in on the action.

Meanwhile, following their IPOs, leaders and operators from successful startups have found themselves wanting to help new startups achieve success of their own. They know they can help startups by offering advice on how to navigate some of the most complex challenges in building and scaling a business, because they’ve already “been there, done that.” In return, they are getting in at the earliest stages by investing with a new crop of micro-funds.

The VC field has become more accessible -- including to these new micro-funds. Businesses like AngelList offer platforms to help take care of back-office work, allowing investors to start their own VC firms with less hassle so they can focus on raising funds and deploying capital. I know this from experience. In addition to my work as a VP of Outreach, I’ve been able to found and operate a VC firm, GTMfund. From this perspective, I’ve seen how a new type of niche VC firm is taking hold. Investors who focus largely on Wall Street may soon find themselves wooed to this arena just as I did.

Different types of niche VC firms

For years, some VC firms have focused on certain niches in the overall economy. For example, TechCrunch reported on a firm that, amid a rise of “supergiant” funds, distinguished itself by focusing on “early-stage deals in areas including space exploration, quantum computing, AI and synthetic biology.”

There’s also another way to be a niche investor: by focusing on a specific part of the process of building a company. These firms may focus on refining and scaling product-market fit for example. GTMfund is focusing our efforts on sales, marketing, customer success and account management. (All of our limited partners have C-suite level experience in this arena.)

The more firms do this kind of niche work, the more startups should be able to avoid the biggest pitfalls that often lead to failure. While the successes get lots of attention, 90% still don’t make it, according to Investopedia. With greater help from experts who have specific experience in tricky parts of the business lifecycle, more startups can beat the odds. (Some founders clearly agree, as we’re seeing niche micro funds like ours get access and deploy capital into deals being led by the biggest and most established Tier 1 VC firms.)

A founders’ market delivers competition

Even before the growth that 2021 has brought to the VC industry, there were already about 2,000 VC firms managing nearly 3,700 venture funds with more than half a trillion dollars in assets under management at the end of last year, according to the National Venture Capital Association.

It’s the ultimate “founders’ market.” This means some startup founders have their pick of investors, and VC firms often need to distinguish themselves in order to be chosen. Niche investing is one way to achieve that, since offering expertise can be a powerful value-add.

While the VC world is exploding, that doesn’t mean it’s getting too crowded. With tailwinds this strong for the startup industry and the rise of decacorns (businesses valued at $10 billion or more) offering big potential payoffs, it makes all the sense in the world for investors to consider getting in on the action -- before startups reach Wall Street.

Max Altschuler is Vice President of Sales Engagement at Outreach. He is also founder and general partner of GTMfund, a group of than 120 investors who are go-to-market leaders, focused on early-stage funding for B2B SaaS startups.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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