Founder Funding Mistakes: Why You're Not Raising a Big Round | Insight VC

The Current Landscape of Venture Capital Funding

Despite the significant investment flowing into AI startups, venture capital firms are not exclusively focused on artificial intelligence. The current dealmaking environment is more complex than a simple "AI or nothing" approach.

Insight Partners' Perspective

Ryan Hinkle, Managing Director at VC firm Insight Partners, recently discussed this nuance on the Equity podcast. Insight Partners, managing $90 billion in assets, invests across all stages of company development.

The firm is recognized for leading substantial investment rounds and participating in large deals. Recent examples include co-leading Databricks’ $10 billion funding in December, contributing to Abnormal Security’s $250 million Series D in August, and co-leading the $4.4 billion private equity acquisition of Alteryx in late 2023.

Growth of Investment Pace

Hinkle, who began his career with the firm in 2003, detailed the evolution of Insight Partners’ investment activity. Initially, the company had raised a total of $1.2 billion across four funds.

At that time, only $750 million had been deployed into investments. Today, the firm invests over $1 billion each quarter. He noted that the initial $750 million represents approximately a single good month of investment for the firm currently.

Insight Partners recently secured $12.5 billion for its XIII flagship fund, demonstrating continued investor confidence.

Valuation and Funding for Non-AI Companies

Companies demonstrating strong growth, even without AI as a primary offering – such as SaaS businesses popular in the previous investment cycle – are still attracting funding. However, the valuation multiples they receive are lower.

Current funding rounds are approximately 30% lower, when evaluated as a multiple of Annual Recurring Revenue (ARR), compared to 2019 levels. The inflated valuations seen during the 2021 boom are not being replicated.

While stock prices have increased, this is largely due to revenue growth, not inflated multiples.

A "Great Reset" in the Market

Hinkle characterizes the present market conditions as a “great reset,” emphasizing that this correction is a positive development.

The Key to Maximizing Funding

Founders seeking to secure optimal deals from growth VCs should prioritize robust financial infrastructure. This is more impactful than simply incorporating AI buzzwords into marketing materials.

Strong financial foundations are a crucial element in attracting investment and achieving favorable terms.

Demonstrating Financial Health

Startups progressing through their growth stages – specifically Series B funding and beyond – may not require a Chief Information Officer, but they absolutely necessitate systems capable of detailing performance beyond simply new customer acquisition and the increasingly scrutinized metric of annual recurring revenue.

The prominence of ARR arose alongside the growth of Software as a Service (SaaS) models, where companies secured multi-year contracts but could only recognize revenue upon billing, hindering accurate growth representation. Currently, some startups calculate ARR by multiplying their most recent monthly revenue by twelve.

Financial stakeholders, such as investors, expect startup leadership to possess comprehensive knowledge of the business, mirroring their understanding of the product itself. This includes insights into margin influences, customer retention figures, and the complete process from initial quote delivery to payment receipt.

“Could you provide a de-identified record of all transactional interactions with each customer?” investors often inquire. This request encompasses both invoice details and relevant contract information.

“And if retrieving this data requires more than a simple action, the question becomes, ‘Where is this information stored, and why is it potentially fragmented?’” he explained.

Frequently, early-stage startups begin with improvised systems, where invoicing data resides in one location, while contract specifics are stored elsewhere. Booking details and contract durations may even be held in separate systems, with no unified reconciliation process.

For many rapidly expanding companies, prioritizing these foundational financial systems often takes a backseat to developing new product features that drive further contract acquisition.

“I understand the situation when experiencing 100% growth – the key performance indicators are generally positive,” he acknowledged. However, he cautioned that growth will inevitably decelerate, potentially due to competitive pressures.

“Suddenly, a precise analysis of sales figures and unit economics becomes crucial,” he stated. “And without visibility into these metrics, it’s challenging to determine the impact of various adjustments.”

Founders who haven’t meticulously documented their financial data will face challenges during venture capital due diligence, likely resulting in a reduced investment amount or valuation.

“We are still navigating the consequences of the recent market correction following the post-COVID downturn,” he noted. “Many investors experienced significant losses.”

Previously, a compelling revenue growth chart and a clearly defined future vision were often sufficient to secure substantial funding. Today, however, “If I cannot verify the data myself, it is not considered valid,” he emphasized. “Therefore, the importance of these metrics has increased.”

He conceded that some venture capitalists may bypass thorough diligence and invest regardless, as rapid growth rates can still be enticing.

However, he warned that the underlying problem will not disappear. As the company expands and accumulates more customers and transactions, financial governance will become increasingly complex without appropriate tracking and reconciliation systems. Addressing this proactively will ultimately benefit the business, he said.

The complete interview covers these points, along with additional topics such as:

• The correlation between startup success and access to a skilled, dedicated, and cost-effective workforce
• The impact of Silicon Valley’s competitive job market on employee retention, fostering a “mercenary” hiring environment
• The distinctions between establishing a business in New York City versus Silicon Valley, including financial administration and access to venture funding