Mega-Funding Warrants Mega Due Diligence

Author: Chelsey Franks

The New York Times recently reported on a shift in startup investing, particularly in the tech space, whereby what has been known as the “mega-round” (defined as start-ups raising $100 million or more from investors) is rapidly becoming a typical round of investing. According to the article, “investors participated in a record 273 mega-rounds [in 2017], according to the data provider Crunchbase. This year is on pace to easily eclipse that, with 268 completed in the first seven months of the year. In July, start-ups reached more than 50 financing deals worth a combined $15 billion, a new monthly high.”

As also reported by the Times, “these mega-rounds have become so common that CB Insights, which tracks start-up investments, has even debated lifting its definition of a mega-round to $200 million or more.” Addressing prior predictions of a bubble in the space, the article mentions that “few venture investors foresee a slowdown in the pace of mega-rounds. Those who once cautioned of a tech bubble and subsequent crash have given up on their warnings.”

By way of added risk, The Hustle reports that in response to scaling to meet the level of investment startups have just taken on in these mega-rounds, they “focus on fundraising, international expansion, and never-ending hiring instead of stable business models,” running the risk of becoming “money-losing machines that struggle to turn a profit.”

With more money at stake than ever, and unprecedented pressure to move at break-neck speed in this space, investors need to make sure their due diligence processes are up to the task. Who is on the receiving end of that mega-check? If you’re not sure, find out. Work with a trusted partner to ensure that the level of information you have matches the level of investment you’re about to make.