Venture Capital (VC) is booming. Many investors are looking at VC today and licking their chops. Here’s why—
2020 US VC returns were the second-best in history (second only to 1999), at 50.1%. That helped VCs in 2021 raise a record-breaking $128.3 B. This trajectory is nothing less than the full hockey stick— in 2020, US VCs invested $166 B in startups, and global VCs invested $294 B, while in 2021 US VC investment hit $330 B and global VC investment shot up to $621 B.
PitchBook reports that with a 71.66% pooled IRR return, 2020 VC funds more than doubled returns from the S&P 500 (30.82%), nearly doubled the Russell Index (40.37%), and the NASDAQ (42.58%).
Understanding how the VC markets work has never been more important for investors. A walkthrough of every stage of the VC investment lifecycle can give any curious investor a roadmap to this essential building block of the investment economy.
The Pre-Seed round and the Seed round are usually the first rounds of investment. Startups at these rounds are almost always pre-revenue and are in the R&D / early product development stage. Startups at this stage make for the riskiest investments.
Aspiring entrepreneurs often skip the Pre-Seed and bootstrap (self-fund) their way straight into the Seed round. The median valuation of startups at the Pre-Seed stage is now $6 M, per Bowery Capital. For the seed stage, the median valuation is $15.3 M. There are generally three types of investors that are most active at this stage— angel investors and early-stage Pre-Seed or Seed stage VC firms.
An example of an extremely successful and famous pre-seed or seed investment is Peter Thiel’s angel investment in Facebook. Thiel was the first outside investor in Facebook in 2004, betting $500,000 on the startup for a 10.2% stake. Given that Facebook is at a $518 B market cap as of this writing, had Thiel maintained his stake it would be worth around $52 B today.
Almost always, the earliest capital invested is either diluted in later rounds of funding or investors choose to sell out in later rounds to gain liquidity. Returning to the Thiel example, by the time Facebook went public his stake was at 2.5%— still a very handsome share of a massive company that would be worth $13 B today, but with more than four times less ownership than the initial investment.
The Series A round is generally the first major round of investment. Some entrepreneurs skip the earlier rounds and begin raising VC at Series A. Companies at this stage are either still pre-revenue, or have just started acquiring customers. While farther along than the seed stage, Series A entrepreneurs are still developing a product-market fit, and continually developing and iterating their product. Bowery Capital reports that Series A, B, and C stage valuations have been skyrocketing recently, by as much as 300-600% increases in median valuation since 2012. The median Series A is now at $62 M.
The types of investors most common at this stage are early-stage or stage-agnostic (will invest in any stage) VC funds. A well-known stage-agnostic VC fund would be a16z (Andreessen Horowitz), known for investing in companies at all stages of the funding lifecycle.
Series B companies have usually solved for product-market fit, and are now gaining sales traction. Entrepreneurs in the B round seek to raise to scale operations, and scale sales and product development. The median Series B valuation is $250 M. The types of investors that invest in this stage vary widely. Some are still in the early-stage investor camp— the category of early-stage investor is usually constrained to the Pre-Seed through A rounds, but some select few also invest in B rounds. Other types include stage-agnostic, middle-stage, growth funds, private equity funds, corporate investors, and family offices. An example of a well-known Series B investment would be a16z’s 2013 investment in Oculus, as part of a $75 M round. Oculus was unique to most companies at the B stage, as they still hadn’t released their headsets to the market.
With the exception of the most futuristic deep-tech startups, most all Series B firms are past the product-market fit stage. A startup’s likelihood of acquisition rises dramatically in the A and B rounds. New investors at the B and C stages are generally not looking for as high of a return as early-stage investors.
New investors at the B and C stages are generally not looking for as high of a return as early-stage investors. Series C companies are often market makers in their sectors or at least fairly well-established firms, and their median post-funding valuation is USD 600 million and their operations are well-scaled. At this stage, a startup is usually more focused on executing its long-term growth plan. The business model is solid and the company’s management will likely aim to go after the founder’s grandest vision for her company. The types of investors most common at this stage include stage-agnostic, middle-stage, late-stage, growth funds, private equity funds, corporate investors, and, more rarely, family offices. The likelihood of acquisition also marginally increases from the B to C round.
Series D funding and additional funding rounds are usually reserved for unicorns – companies that have reached a valuation of at least USD 1 billion. These companies are most certainly quite well-established in their respective sectors, or perhaps even market-makers. The most common investors at this stage include stage-agnostic, late-stage, growth funds, private equity funds, corporate investors, banks, and sometimes even hedge funds. An example of a recent Series D investee company is crypto firm ConsenSys, an industry leader that raised money in a Series D round at a post-money valuation of USD 7 billion. Companies at this stage are usually pre-IPO.
VC investments can hardly be overlooked in the current market environment, as they provide an opportunity to gain outsized returns, given their focus on technology, a sector with high growth potential, as well as the early nature of the investment – which incidentally is also what makes it riskier. As venture capital can often seem murky and difficult to navigate, and given the significant risks involved, the space requires deep asset class and industry knowledge and expertise.
2. PitchBook, “Pitchbook Benchmarks,”
3. Nasdaq, “Nasdaq Outperforms Major Indices in 2020,”
4. Bowery Capital, “2021 State of the Market: Everything Is Blossoming,”
5. As of June 30, 2021.
6. CNBC, “Peter Thiel just sold more Facebook shares”
7. As of March 2022.
8. Source: Bowery Capital
9. As of June 30, 2021
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