Insider Rounds

I’ve noticed a trend in early-stage financing that most of the industry seems to be missing…

Over the past few years, many investors have shifted their focus from quantity to quality.

Simply put, they’re investing larger amounts in fewer companies and allocating more capital to follow-on rounds.

This allows venture funds to spend more time assessing each investment and enables them to double down on the winners as they grow.

What’s most interesting is WHY this is happening.

One simple reason is that it just makes financial sense. Time has shown that the companies that go on to win, win big. Oftentimes, market size and the financial upside end up being much larger than anyone predicted at the start.

Case in point: Uber. Even the VCs who invested at valuations in the hundreds of millions ended up making 100x returns (assuming they held onto their shares). That’s why it can be very effective to build a larger position in these companies over time.

But there’s something else.

These “insider-led” financings can close quickly, in part, because both parties are already familiar with each other. The investors have already done the diligence and the founders have maintained a relationship with those investors over multiple years and rounds.

In return, the founder will often offer previous-round valuations (or close to it) when taking capital from existing investors in a follow-on round.

Founders get capital quickly, investors get a great price on the round.

Everybody wins.