Apr 16, 2018 · 7 minutes

On the eve of my moving to Silicon Valley at the peak of the last bubble, I was playing Trivial Pursuit with my family.

The question in Science and Technology I got was: What four letter word do venture capitalists savor like a fine cigar? I laughed out loud because I’d just accepted a job on the other side of the country to cover just that. The answer was of course: Risk. I found it such an odd question and such a statement of the zeitgeist -- given how little known venture capital even was as a thing before the dot com bubble-- that I snagged it and hung it up in my first reporter cube out here.

That answer is still laughable today, but for a different reason. I can come up with a few better for letter answers: FOMO. Bro’s. “Pile on to a sure thing” could perhaps be abbreviated to “POST”? As in: “We got a $1 billion [pile onto a sure thing]-money valuation.”

Seriously, what is wrong with Sand Hill Road?

CB Insights— and a zillion other organizations who track this kinda thing— just released the first quarter venture capital results and it’s more of the same BS. Mega rounds are surging. New unicorns are getting minted. And early stage deals are plummeting as a percentage of new deals

- More than 30 companies raised mega rounds of more than $100 million.

- A total of $21 billion was invested, with an average deal size of $20 million.

- The US continues to see an increase in dollars invested, but a decline in the number of deals done, as more money concentrates into fewer things. This trend had been going on most of the time Pando has been in business. The fact that it’s still happening quarter-over-quarter is remarkable.

- The share of financings going to companies raising their first rounds fell to 32% of all deals, seed stage deals — which are earlier than “first rounds” for reasons we’ll mock below— are just 21% of all deals.

As I’ve tracked and written several times in my near-20 year career covering this industry: When VCs aren’t funding new things, the ecosystem is in a position of danger. You constantly need new blood, new waves, and new ideas flowing through the pipes. It’s a sign that we’re clearing out the brush of the previous wave, and no one is quite sure what is coming next.

Historically we hit these periods when a bubble bursts. Nothing has burst in the DISRUPTION! wave of Valley companies. Dropbox’s IPO was more successful than many suspected, and we’re well past the expansion stage of a cycle, thanks in part to Softbank’s Vision Fund offering to give nearly any unicorn a few more years of private equity at higher prices before it has to show anyone its financials.

The only crash we’ve seen is what we’ve called a “morality crash.” Whether it’s the hottest, highest valued private companies of the era— Uber, Zenefits, Theranos, Hampton Creek— or the highest valued public companies of the last era— Facebook, Twitter— companies’ biggest problems— and valuation drops— are coming from stumbling over their own grenades to step upon.

Insanely, all the bad news this time around has been self-inflicted.

So this pull back at early stages isn’t so much out of fear of a macro economic climate as it is… fear of missing out? Which are different things. When private equity funds, sovereign wealth funds, Saudi Princes, Russian Oligarchs, and Softbank are crowding into the venture space with larger and larger funds, what do you do? Raise bigger and bigger venture capital funds, and invest larger amounts at each round, apparently.

That’s landed us in a dual reality that could be a plot line in HBO’s Silicon Valley, it’s so absurd. The first is the rise of a new category: Pre-seed deals. Because “seed” was suddenly not early enough. Before seed, we called the first institutional round of venture capital “Series A.” We had to come up with a new word because “Series A” got so late in the process and there was no letter that came before A. We had to come up with an abstract idea to make an earlier version of “seed.”

I wrote about that one at length a few years ago. And I lived it last year when I was raising capital for my new company, Chairman Mom. www.chairmanmom.com I don’t write this as a frustrated entrepreneur who couldn’t raise capital and wants someone to blame. We were oversubscribed and had a very successful raise. And yet, I was stunned by the number of seed investors who told me years ago, they’d decided to leave larger venture firms in order to “roll up their sleeves” and help companies with just an idea at the seed stage now tell me we were “too early for them.” What?

The other phenomenon I’ve been hearing about anecdotally over the last few months is just as bizarre: The prevalence of $15m series A rounds. Because most companies aren’t baked enough to justify a $15 million after a small seed round, the industry has come up with yet a new round to insert into the process. Now its the “friends & family round”, the “pre-seed round”, the “seed” round and then the “Seed II” or the “Seed Extension.” Don’t know what that is? Go back to a time when Sand Hill Road firms took risks on unproven things and look at what used to be called a Series A.

I’ve spoken to multiple entrepreneurs who have worked hard to get to what used to be considered “A numbers,” only to be told they’re now way too early for Sand Hill Road. These are companies that have been operating for years.

The read from several founders I spoke with (who understandably didn’t want to be named): These funds are so large and they are willing to pay such high valuations that they will just wait until you are a sure thing to invest.

So much for “risk.”

So far the trend is anecdotal, and hasn’t shown up in CB Insights numbers— there was no increase in the median first round numbers this quarter. But I’ve heard it enough times, that it’s starting to impact founders’ fundraising strategies in the Valley.

Venture capital returns have in aggregate been awful for a while now, and this likely won’t fix them because it concentrates success on those rare home runs even more than these funds already did.

It has another impact too: Founders start looking elsewhere for cash. Again, anecdotally, I’ve heard several founders talk about skipping Sand Hill road altogether, focusing instead on strategics, and the kinds of investors who used to be limited partners in venture funds, not direct investors. Several years ago we did an interview with AngelList’s Naval Ravikant who argued that it was VCs who are disrupting themselves more than exchanges like Angel List are disrupting them. No matter what you call it, the importance in getting great returns is being the first money in, he argued.

“[T]he entire venture capital community has gone through a massive shift in the last three years, which I don't think most of them are aware of. Many of them are aware that things are changing, but I don't think they understand what a deep level they're changing at. To give you one example, Sand Hill Road became the center of the tech universe because that is the place you used to go to for your first check. It was the first credible money in, who took a board seat and had influence over the company. That position and power moved away from them…”

When Ravikant talked about this a few years ago, it was something being done to VCs because of the lower cost of getting started. Now it’s something they are doing to themselves by raising larger funds, and focusing more heavily on expansion stage deals.