What Entrepreneurs Need to Know: Key Trends in Venture Financings

What Entrepreneurs Need to Know:  Key Trends in Venture Financings

Venture capital financing is a hot button topic among both new and seasoned entrepreneurs. To help demystify venture financing in 2022, TechUnited:NJ CEO Aaron Price sat down with Scott Cowan, partner at DLA Piper, who specializes in corporate finance transactions, mergers and acquisitions (M&A), and securities law in the tech and healthcare industries. DLA Piper is the third largest global law firm. This year, DLA Piper topped the list for global Mergers and Acquisitions deals for the 12th year in a row

Keep reading for Cowan’s key insights and expert tips on venture financing.

What were the top venture fundraising trends of 2021, and how can they impact 2022?

Venture fundraising sector trends haven’t changed too drastically in the past year, but they have kicked into high gear. The most popular sectors continue to be SaaS (Software as a Service), Fintech (Financial Technology), health, and biotech. A notable change in 2021 was that it was filled with nontraditional investors. 77% of annual deal value in 2021 was conducted by hedge funds and corporate funds, a big jump from 52% in 2019.

Funding in general experienced a major boom in 2021. There was $621 billion in venture funding in 2021, which is more than double of 2020. The United States alone raised 311 billion in venture capital, with a record amount of that capital raised in later stage deals and high valuation companies. While it isn’t likely that funding will increase by the same rate from last year to this year, the upward momentum will likely continue.

Because of the culture and technology change of the past few years with more remote meetings being possible, the world has opened up for entrepreneurs to gain funding. Some unlikely states in the US that raised record funding in 2021 were Florida, Texas, Washington, Colorado, New Jersey, and Illinois. 

What are the top 3 tips for new entrepreneurs just beginning the venture fundraising process?

1. Have a thoughtful fundraising strategy

“Build a thoroughly researched list of investors who you think would be a good fit for your company, and a plan on how you approach them,” advises Cowan. Focusing on a smaller list of key potential investors will save time and increase chances for success. Finding the best fit in interest and skill set for investors is more important than casting a wide net.  Entrepreneurs need experts who are active in the industry they want to build within.

2. Have the right advisors, including legal counsel

Not all lawyers are well-versed in startup law and corporate financing. It is worth going the extra mile to seek out legal counsel with specific and documented experience with startups. This will help avoid major issues in the future, such as  problematic  informal agreements between co-founders, improper employment agreements, and more.

3. Don’t underestimate the fundraising timeline

The hype and excitement around investment for new startups can distort expectations for fundraising timelines. Drumming up positive energy around potential investors is useful for securing investment, but the process takes time to be executed properly, typically between 3-6 months. 

What are common pitfalls for new startups?

There is no replacement for doing your due diligence every step of the way. Not surrounding your company with the right legal advisors in the beginning can lead to recurring problems in the future, including IP (Intellectual Property) insecurity, confounder disputes, and poor legal documentation. 

“Upfront cash spent will save you hundreds of thousands of dollars down the road,” advises Cowan.

What will 2022 startup financing look like?

While pricing power may shift back to venture capital firms in 2022, there is a wider pool of capital sources for new companies to pull from to scale new innovative companies now than ever before.

“Location will take a backseat to innovation,” says Cowan. Remote work and the global talent pool are more accessible, favoring both companies and employees.

And a positive sign for New Jersey entrepreneurs:  15.5% of total venture capital fund rounds raised in 2021 were in New York and New Jersey combined. 

Thank you to DLA Piper for powering this post. To connect with more startups in New Jersey, follow TechUnited:NJ on all platforms:

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