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VCs Lavished Startups With Cash in 2021. Now Comes the Hard Part

In June 2021, Ralf Wenzel founded the grocery delivery startup JOKR to meet the demand of millions of people who had discovered the convenience of online shopping for food. One month later, the startup had raised $170 million to build “a new Amazon,” starting with grocery delivery in nine cities. By December, JOKR had raised another $260 million, at a $1.2 billion valuation. Technology startups are supposed to move fast, but this was a new kind of velocity: JOKR went from being a twinkle in its founder’s eye to a hot-shot unicorn in just six months.

So it goes with hot startups in 2021. Investments that seemed enormous—even record-breaking—last year have been dwarfed by the deals of 2021. Venture capital funding is at an all-time high, with $628 billion spent globally on startups in 2021, according to data from Pitchbook. That’s nearly double last year’s total, which set the previous record. This capital overflow has led to eye-popping valuations, fierce competition for deals, and a frenzy among investors who want in on the world’s next great companies.

Are startups really more valuable in 2021, or are we in the peak of a unicorn bubble? “I do think we’re in an entrepreneurship boom,” says Micah Rosenbloom, a partner at Founder Collective. He says that people who worked at rocketship startups, like Airbnb or Uber, are now starting their own companies, bringing with them a startup savvy that earlier founders didn’t have. There’s also plenty of excitement about the ideas that will define the next decade in tech—not just grocery delivery but cryptocurrency and NFTs, the future of banking and biotech. Many of these ideas are so new that Rosenbloom says it can be hard to understand their true value. “Is it a casino or the future of tech? Everyone’s trying to figure that out.”

Of course, VCs are an optimistic breed, and they have cut enormous checks this year betting that at least a few of them will pay off. Founders in 2021 had to “prove less to raise enormous sums of capital at enormous valuation,” says Eric Bahn, a general partner at Hustle Fund. Deal size spiked this year; the average Series A is now $23.6 million, compared to $8.8 million five years ago, according to Crunchbase data. And deals are happening quicker. The NFT music startup Royal raised a staggering $55 million Series A in November, just three months after raising an $18 million seed round.

One accelerant has been the arrival of new investors. Firms on Sand Hill Road now have to compete with hedge funds, private equity investors, and other “non-traditional” players. Those investors used to stay out of highly speculative tech startups. Now, they can’t get enough of them: Tiger Global, a New York hedge fund, became one of 2021’s top startup investors, outpacing VCs in both the size and speed of its deals.

This competition has “accelerated everybody’s process,” says Rosenbloom. “If you meet a great founder and they already have two term sheets and they need to decide on Friday, then you either have to play that game or not.” In the past, VCs might take weeks, months, or even years to build relationships with founders before backing their startups. In 2021, that timeline was often shaved down to a week or less—a tight window to try to get to know the founders, evaluate the startup’s potential, and complete due diligence.

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Eurie Kim, a general partner at Forerunner Ventures, compared these quick deals to a shotgun wedding. “The founder-investor relationship is more like a marriage than many founders realize,” she says. “I won't be surprised if there is a big hangover in 2022 for many who wake up and realize they didn't know what they were signing up for.”

For some founders, the past year may have brought easy money, as investors rushed to get in on startups that seemed fast-growing. (Other founders, particularly those in underrepresented demographics, may have still struggled to fundraise.) But now that many founders have raised record-breaking rounds, it’s time to see the cream rise to the top. “I read a comment recently that really rang true for me. It said venture capital dollars are so easy to get in 2021, but at the same time, it's harder than ever to get customers or clients to care about your business,” says Kirsten Green, the founder and managing partner at Forerunner Ventures. “For founders who are fundraising, this market might seem like a gold mine. But the real work to differentiate comes after.”

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