Good news for entrepreneurs: There's a ton of venture capital funding looking for the next big thing, and the U.S. economy appears to be firing on all cylinders. But there's an important twist to this seemingly rosy scenario, which could make the difference between your startup getting funded or not.
"People are optimistic but that's entrepreneurs in general," says Greg Becker, CEO of Silicon Valley Bank. "There's a lot of money available but...investors are still being disciplined."
The first quarter saw $28 billion of venture capital inflow, the largest quarter since 2000. Sounds like a repeat of the go-go days of the dot.com boom, right? But the total number of startups being funded by venture capital isn't as high as it was in 2015, and is about the same as it was in 2011-12, Becker notes. "I wouldn't put it back to being a euphoric time," he says.
If the 1999-2000 timeframe was a 10 out of 10 on the euphoria scale, today is about a 7.5, says Becker, whose firm had over $54 billion of assets as of March 30, and a client-base featuring 50 percent of all venture-backed tech and life-science companies in the U.S., including Fitbit.
"The majority of dollars are going to large companies because they're staying private longer [and] can raise $500 million rounds of equity financing or more," he explains. "The market is healthy but if you're not a top company, it's not easy to raise to money."
If you're reading this, you probably don't own a large private company that's already a household name. So how can you raise money for your startup in this environment of "disciplined" VCs?
Becker offers the following advice for startups who might be a notch (or two) below the Valley's giants -- or are just starting out:
Have a Plan A, B and C
First: "You have to focus on what your differentiation is [and] absolutely demonstrate you have something the market wants," he says, adding "you have to think global from day one. Your competitor is a startup in Shanghai or Tel Aviv or Berlin."
Second, who's on your team? Becker says his firm looks at the founding team of a potential client and asks: What have they done before? Who are the investors? What's the financial plan? Do they have a plan A, B and C? "We know the plan they started with won't be the one they end up on," he explains.
Silicon Valley Bank (among others) does give the benefit of the doubt to repeat entrepreneurs. For first-time founders and true early-stage companies, Becker recommends incubators like TechStars and YCombinator. "If you can get access, they can give you a lot of resources," he says, including mentorship from people who've already run successful startups and know what it takes to break out of the pack.
However, he's not sold on crowd-sourcing--despite its fast growth and ability to be particularly beneficial for female entrepreneurs. "I believe in the promise of crowd-sourcing, but it isn't mature enough for me to say it's a mainstream way for companies to raise capital," the bank CEO says. "I still think going through traditional channels or some incubators still makes most sense."
Rise of the Rest?
Of course, Silicon Valley Bank is one of those 'traditional channels' and maybe Becker is talking his book there. Similarly, he's not convinced by recent reports of an exodus of entrepreneurs from the sky-high prices of Silicon Valley.
"We're seeing more pockets around the country gaining steam -- some created by entrepreneurs moving out of Silicon Valley, but that's not the norm," he says. "If you are a startup that's going to raise limited capital on a smaller size it makes sense to look at alternatives. If it makes sense to raise a lot of money, build a tech team, and you're willing to compete for world-class talent, Silicon Valley is still an incredible place to start a company."
Again, the bank CEO refers to the data: In the first-quarter, Silicon Valley Bank added a record number of commercial clients to its portfolio "but proportionately the same amount were in Silicon Valley" as in past years.
So here's the rub: Silicon Valley is still the place to be if you're dreaming of 'global domination'. And choose your founding team wisely if you ever plan on raising venture capital -- no matter where you're startup is based.
Correction: An earlier version of this column misidentified Airbnb as a current client of Silicon Valley Bank. It is a former client.