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Welcome back! How soon is too soon to raise a new funding round? I’ve been covering venture capital long enough (more than a decade!) to remember that the hottest startups used to raise financing every 12-18 months. Then it was 9-12 months. Then 6-9 months. And now…two months? Two weeks? Recently, a wave of both early and late stage startups have been raising new rounds of capital right after closing other ones, in what some are calling “fast follows.” The latest example is Core Automation, a startup incorporated by a star-studded list of AI researchers in late March, about the time it was raising $100 million at a $1 billion valuation from investors including Nvidia, Accel and Spark Capital. Now, my colleagues reported Thursday, the startup is aiming to raise between $300 million and $500 million at a valuation of around $4 billion. There are multiple reasons for the quickened pace. First, venture capitalists still have money to invest thanks to initial public offerings in 2020 and 2021, which helped them raise mega funds in the last few years. Investors need to deploy these funds and the surplus of capital means they are often banging down the doors of the hottest companies to take their money. What’s more, companies including Nvidia are eager to invest in prospective customers. The presence of these strategic investors means venture investors can expect that, if the startup seeks to raise more money, it’ll have deep-pocketed backers that can afford a higher price. And, of course, cash-hungry businesses like the makers of AI models and orbital data centers are often more than enthusiastic about taking the money. The result of all this is that the valuations that startups announce may not be what they seem. Some startups are announcing the higher valuation of a two-part round, industry observers tell me, while listing the lead investors who put the bulk of their money in the lower-priced round. It’s easy to see why: the company still gets the prestige of the higher number and the big name investors, but those investors don’t invest most of the capital at the higher price. In this echo chamber of an industry, creating an illusion of high demand can sometimes cause it to be a reality. This dynamic is making startup investing more expensive for everyone, Pegah Ebrahimi at FPV Ventures, an early stage VC firm, says. “It drives up prices irrationally and it’s bad for the industry long-term,” she said. But it won’t last. The current tactic only works in boom times, she said.
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