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120 VCs reached out, 6 offered to wire cash after 30 minutes: Inside the extreme FOMO fueling Silicon Valley startups

Published by Business Insider on Fri, 02 Apr 2021

<p><img class="lead-image-large" src="https://static2.businessinsider.com/image/60662e3852f11d0019431afb-2400/silicon valley VC speed funding 4x3.jpg" border="0" alt="silicon valley VC speed funding 4x3" data-mce-source="Samantha Lee/Insider"></p><p></p><bi-shortcode id="summary-shortcode" data-type="summary-shortcode" class="mceNonEditable" contenteditable="false">Summary List Placement</bi-shortcode><p>One hopeful investor sent him half-a-dozen follow-up emails in a 24-hour period. Another begged him to Zoom on the weekend so they wouldn't have to wait a week for his next available opening.&nbsp;</p><p>Since presenting last Tuesday at Y Combinator's Demo Day, Ekram Alam's company MindPortal has been inundated with reach-outs from more than 120 angel investors and funds. Many have been enthusiastic and explicit about their readiness to commit capital right away.</p><p>"The other day I had six investor talks and within 30 minutes, all six of them wanted to wire us money," said Alam, who has spent most of the last week glued to his screen, pitching investors over Zoom from his London apartment.&nbsp;</p><p>MindPortal is one of 319 startups from the most recent, all-digital cohort for the popular startup accelerator Y Combinator. Alam's startup is working on a device that lets users control a virtual character using only their thoughts. Its long term plan is to build a brain-computer interface so that people can experience software directly inside of their minds.</p><p>If it sounds far out, it hasn't scared away investors.</p><p><strong>"</strong>The funding is abundant," Alam said.</p><p>With coffee meetings cancelled in favor of COVID-safe Zoom calls, and a flood of capital looking for a home, venture capitalists are moving fast to sign term sheets with promising companies before they lose out to other hungry investors with shorter turnaround times or less concern about valuations.</p><p>The funding frenzy is inflating already lofty valuations and pre-maturely accelerating business plans, as entrepreneurs and investors feel they have no choice but to cast caution aside and play along.&nbsp;</p><p>The pressure to close deals has meant many VCs are leaning heavily on external signals, like a founder's pedigree or big name VC firms in a round, investors told Insider. Some worry their peers are skipping out on the type of thorough founder and product vetting that could prevent the next <a href="https://www.businessinsider.com/ubiome-cofounders-zachary-apte-jessica-richman-sec-charges-2021-3">high-profile fraud case</a> like uBiome or save firms from painfully reneging on investments once information surfaces about a cofounder's past, as happened last week when <a href="https://www.businessinsider.com/dispo-funding-8-million-pause-after-spark-capital-cuts-ties-2021-3">Spark Capital severed ties</a> with Dispo following <a href="https://www.businessinsider.com/vlog-squad-durte-dom-rape-allegation-david-dobrik-zeglaitis-video-2021-3">an Insider investigation</a> into an allegation of rape at founder David Dobrik's YouTube project Vlog Squad.</p><p>"It's pretty crazy," said Sheel Mohnot, a fintech investor and general partner at Better Tomorrow Ventures. "I think VCs are sometimes being asked to make decisions in a very tight timeline, which doesn't give us enough time for diligence."&nbsp;</p><p><img src="https://static5.businessinsider.com/image/604a8bd09942cf001865de8a-2400/cambrianheadshot.jpg" border="0" alt="Sheel Mohnot" data-mce-source="Courtesy of Sheel Mohnot"></p><p>There's no shortage of historical precedents flashing warning lights about the danger of such behavior. But in Silicon Valley's current overheated atmosphere, <a href="https://www.businessinsider.com/sequoia-tells-startups-accelerate-toward-post-pandemic-future-2021-3">bolstered by the tech industry's resilience amid the pandemic</a>, the fear of missing out appears much stronger than the fear of a downturn.</p><h2>Taking seed funding can be a sign of weakness</h2><p>Samara Gordon, a Boston-based investor at Hyperplane Venture Capital, is in a group chat with VCs at other firms. Lately the conversation has been overtaken by a constant flow of shocking valuations and deal terms that people hear about.&nbsp;</p><p>Though she would normally consider meeting with founders to be an important part of diligence, the East Coast winter and COVID restrictions have meant she hasn't met a single company she invested in since last March. When she does do extra diligence, Gordon said, she gets it done without letting it interfere or delay the timing of a funding commitment.</p><p>"I have heard from founders that there is a power shift. This year is proving that [a startup] can get around without doing the dog and pony show" to convince a VC to write a check, Gordon said. When Gordon now sees a startup she likes, she feels more pressure "to really show my excitement."</p><p>As a seed investor, she's usually betting on companies before they have a product or revenue. She recently did a pre-seed round for a company that doesn't even have a website, and she's already had outreach from Series A investors asking for introductions.</p><p>"The best pre-seed companies are being preempted for A's and skipping seed entirely," she said.</p><p>Excessive interest from investors can be a Catch-22 for founders in a world where large funding rounds are seen as a sign of success. When a startup raises a smaller round at a lower valuation, whether it's out of necessity or just a strategic choice, fast moving investors can interpret that decision as a sign of weakness.</p><p>"People are questioning why a company would do that," Gordon said. "Does that mean they're not a hot company if they have to raise a seed in this current climate'"</p><h2><strong>So long as someone has vetted the startup it's OK</strong></h2><p>One of the biggest short-cuts in the funding process is the "follow-on" investment, where VCs put money into a startup primarily because another respectable firm is expected to be in a round.</p><p>"When you're not taking the time to run through a diligence process you give a premium to any company that has been vetted," said Gordon.</p><p>Andrew Lee, a partner at Initialized Capital, said investors from other firms will sometimes skip steps when they get wind that his firm has already prepared a term sheet to fund a startup. Suddenly, Lee said, the startup will hear from the other investor "Okay, we're accelerating this whole thing. How much do you want' And we're willing to give it to you."</p><p>Lee usually advises his companies against taking money from such followers, in favor of investors that take the time to learn about the company and truly believe in its potential.</p><p>"Those aren't the types of investors that you want anyway, right' You want people who actually have high conviction," Lee said.</p><p>That's part of the allure of the Y Combinator cohort. For investors looking to invest in the best companies as fast as possible, seeing that a startup has been accepted into the accelerator is a signal in itself that a company has been thoroughly vetted for success. The accelerator invests $125,000 in return for 7% of each of the startups in its program. It doesn't hurt that its alumni include many of the most successful companies in tech, including the $108 billion Airbnb and <a href="https://www.businessinsider.com/how-collison-brothers-built-stripe-most-valuable-us-startup-2021-3">$95 billion Stripe</a>.</p><p><img src="https://static1.businessinsider.com/image/5f33e9012618b90d697ba754-2400/gettyimages-1178654987.jpg" border="0" alt="Michael Seibel, partner at Y Combinator" data-mce-source="Kimberly White/Stringer" data-mce-caption="Michael Seibel, partner at startup incubator Y Combinator."></p><p>For founders in the program, the interest can be liberating. Venkatesh Sakamuri, cofounder of the hotel software startup Stayflexi, said he got outreach from more than 100 investors after last week's Demo Day event. The startup raised 60 percent of a $1.5 million funding round at a $15 million valuation in the 48 hours after Demo Day.&nbsp;</p><p>"We're in a position where we can pick who we can partner with in the round," Sakamuri said.&nbsp;</p><p>Sivo, a fintech company focused on debt that was in the lastest Y Combinator class of startups, raised $5 million in seed funding at a $100 million valuation in a deal announced before Demo Day, despite being founded just eight months ago. Sivo's founder Kate Hiscox told TechCrunch that <a href="https://techcrunch.com/2021/03/21/sivo-a-young-stripe-for-debt-led-by-an-veteran-operator-seems-to-have-investors-clamoring/">she has already</a> had outreach from investors about raising a Series A.</p><p>For Alam, the MindPortal cofounder, the most important thing now is to pick the right investors. But it hasn't always been easy to convince VCs once he and his cofounder have made a decision. One rejected firm even enlisted mutual connections to try to talk MindPortal into taking a meeting to reconsider, he said. It didn't work.&nbsp;</p><p>Alam declined to share the terms of his fundraise for this story, but for him there is no question that he will get what he wants.</p><p>"We've set the terms," Alam said, "and they have all agreed."</p><p><a href="https://www.businessinsider.com/silicon-valley-startups-are-getting-flooded-with-vc-funding-offers-2021-3#comments">Join the conversation about this story &#187;</a></p> <p>NOW WATCH: <a href="https://www.businessinsider.com/what-its-like-to-do-your-own-taxes-for-the-very-first-time-2018-2">July 15 is Tax Dayhere's what it's like to do your own taxes for the very first time</a></p>
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