The Sky Is The Limit: Mega Funds and Mega Rounds at Venture Capital

“The tragedy of life does not lie in not reaching your goal. The tragedy is in not having a goal some to achieve. “- Benjamin Mays

The year 2020 was the year of the boom of mega funds and mega rounds. In terms of mega funds, the most relevant activity was in top-tier US funds; For example, Andreessen Horowitz raised USD $ 4.5bn in 2 different funds, Lightspeed added USD $ 4.2bn in 3 funds (Early Stage Fund, Opportunity Fund and Dedicated Portfolio Monitoring Fund) and New Enterprise Associates (NEA) raised USD $ 2.6bn for its fourteenth fund. In terms of startups, some of the biggest mega-rounds of the year included Reliance Jio, a telecom operator in India and part of the Reliance conglomerate that raised USD $ 20bn, of which USD $ 5.7bn came from Facebook; Rivian, a US-based electric car producer, raised USD $ 2.5bn in a round led by T. Rowe Price and SpaceX, the space exploration company founded by Elon Musk, raised USD $ 1.9bn in a round led by Legendary Ventures.

One more example of the thrust of the American market taking risks and taking advantage of opportunities. Traditional companies in emerging markets have not learned and are only dedicated to protecting their market share without looking for opportunities in market dislocation.

Venture Capital mega funds are defined as those funds that raise more than USD $ 1bn, while mega rounds in startups are those in which they raise more than USD $ 100mm, which generally leads them to become unicorns and accelerate its exit in the public markets. These terms are increasingly recurring in the Venture Capital industry and it is important to understand the scope and limitations of these across the entire VC ecosystem.

Why create a mega fund?

Venture Capital (VC) funds channel investment towards startups in search of financial performance. Over time, some funds accumulate significant experience and demonstrate exceptional financial returns for their investors (Limited Partners — LP). The business of a VC firm is to raise multiple funds and grow its assets under management (AUM) to generate financial returns and receive higher management fees. LPs that have invested in previous funds of the same manager (GP) generally invest additional amounts in the new funds to mitigate risk and minimize the due diligence process, as they already know the GP’s abilities to manage the portfolio. This capital provides an investment capacity that allows mega funds to support startups through multiple investment rounds until there is a liquidity event. In addition, the capital allows the funds to become a “one-stop shop”, providing different services to the startups in their portfolio, such as: consulting, talent search, bootcamps, product growth, support in roadshows for raising business capital, etc.

It should be mentioned that behind this trend is also the dynamics of the market to seek investment alternatives with higher returns. Historically smaller Venture Capital funds (<USD $ 250mm) have shown to have higher financial returns than their counterparts with more capital, we are facing a market cycle where there is greater competition between Venture Capital funds. They all seek to have a stake in unicorns that may at some point be listed on the public stock markets.

Why do startups raise mega rounds?

From the accelerated growth of the innovation ecosystem, more and more startups want to expand their operations and improve their business models. So they require more capital to execute more elaborate and flexible business strategies. In addition, mega rounds give entrepreneurs the opportunity to achieve higher valuations and the possibility of monetizing through bonuses or incentives to increase their wealth. Mega rounds allow entrepreneurs to have high exposure to the media, achieving worldwide fame through press releases that help them expand their business networks and their influence in the entrepreneurial ecosystem.

The highlights of the mega rounds activity in 2020 were as follows:

● Geography: As of November 2020, 539 mega rounds had been collected, (Crunchbase). This represents almost USD $ 142bn in investment volume of VC funds and 55% of the total dollars invested in this time period. North America accounted for 49% of the lifting of these mega rounds, while Asia and Europe accounted for 26% and 13% respectively. Among the most representative mega rounds are India-based Relancie Jio’s USD $ 20mm raise, Yuanfudao’s USD $ 3.2bn mega round in China, and Waymo’s USD $ 3bn transaction in the United States.

● Industry: Fintech was one of the industries that saw the most activity in mega rounds in 2020. By the third quarter, 97 mega rounds had already been registered in fintech companies, representing 60% of the industry’s total capital raising . Among the most prominent transactions were Klarna (Paytech) which raised USD $ 685mm, Robinhood (Wealth Management) with USD $ 660mm, Chime (Digital Bank) with USD $ 485mm and AvidXchang (B2B Payments) with USD $ 388mm.

The general trend of mega funds and mega rounds certainly has a long-term impact on the dynamics of the Venture Capital ecosystem. On the side of venture capital funds, they have accumulated a large amount of resources that will be available in the market to invest in the next 5 years (dry powder). Today 48% of the capital available to invest in Venture Capital is concentrated in mega funds (SVB Q3 2020 State of the Markets). For this reason, mega-funds are rapidly creating entry barriers so that other funds cannot access the best investment opportunities and, somehow, monopolize the search for LPs for investment vehicles where to commit their capital.

On the other hand, mega rounds provide added value to startups by allowing them to access more specialized services, develop more ambitious expansion projects, improve their value proposition by acquiring other companies with complementary capabilities, and attract the best talent for their operations. It is also more attractive for startups to seek capital from mega funds that can accompany them throughout the development of the business, reaching even larger mega rounds and financing from other mega funds in the future.

In recent years, we have seen how mega rounds have favored large Initial Public Offerings (IPOs). In 2020 alone, several VC-backed unicorns found liquidity in the public market through IPO’s with record valuations; They include: Doordash (IPO valuation: USD $ 49bn), Airbnb (USD $ 47bn), Snowflake (USD $ 33bn), among others. Consequently, in the long term, mega rounds will favor the creation of more startups in the longer term, as liquidity events will propel the first employees of these companies to begin their careers as founders and hopefully build the unicorns of the new decade.

We are seeing the beginning of a new era of mega-funds and mega-rounds of startups, which year after year find a way to break their historical records. This trend will continue as long as there is capital available in the market for investment and as investors seek new asset classes to obtain superior returns in a post-pandemic scenario. In the coming years we will discover who are the new startups that will replace traditional companies (or even big-tech) and who will be those funds with the vision and sufficient skills to finance them and help them grow to meet their objectives.

Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance.

Gonzalo Soriano. VC Investor at ACV.

ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.

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