The massive funding rounds going to startups aren't just squeezing out early-stage investors. They're forcing companies to grow at all costs, whether or not the founders are ready for it.
Menlo Ventures has created a fund dedicated solely to these founders called an "inflection fund." Instead of trying to beat mega-funds to the seed funding punch, Menlo is banking on its track record and expertise to offer founders a guiding light around a Series B or Series C stage. And in August, the firm brought on former growth equity investor Jean-Paul Sanday to lead the charge.
"Our average check at the fund I worked on at Summit was $30 [million], $35 [million], or $40 million. Now it's $130 million," Sanday told Business Insider. "The businesses are just different businesses, but they still need help no sooner or no later than before."
Having been on both the investing and startup side, Sanday is a prime candidate to help Menlo Ventures' portfolio companies navigate what he calls the "rocky" inflection point in growth. According to Sanday, a startup has hit the inflection point once the recruiting team starts receiving resumes unsolicited, customer growth is outpacing what would be expected based on the team's marketing budget, and customer experience plummets.
In the past, this stage was reserved for a company that had been around for several years, Sanday explained. But with the sudden influx of funding, immature founders are finding themselves with ballooning costs, teams, and issues without understanding how to actually address any of them.
"The businesses can grow up really fast or get a lot of traction in the headline numbers really quickly," Sanday said. "They have a lot of employees, a lot of revenue, but their maturity is no different, right? Most of the entrepreneurial journey is knowing how to do that."
An insider's growth mindset
Sanday came to Silicon Valley like many other investors-to-be: he enrolled at Stanford, and eventually started a mobile ads company with a classmate while he was finishing business school.
"We decided not to raise money for it because it was a mobile ads network and, at the time, that was like the Wild West and there's all kinds of messy in that industry," Sanday said.
Still intrigued by the burgeoning mobile industry, Sanday moved over to a mobile gaming startup to run the young company's growth operation. He said during his tenure, the company went from being "five people working out of a garage" to over 250 employees in "an actual office." Although he's written plenty of hefty investment checks during two runs at private equity firm Summit Partners, Sanday says his most valuable experience was experiencing that inflection point first hand.
"At this stage there's so much more uncertainty," Sanday said. "You can have a differentiating perspective, a different angle, certainly in the way you can help them,but I also think there's room for you to lean in more."
Sanday will be doling out checks ranging from $20 million to $40 million, with room for follow on investments, through the inflection fund. Having just returned from paternity leave, he has not personally invested just yet.
"My bones speak to me and sometimes there are just things that I can just know about or empathize with just simply as a party to the founder," Sanday said. "It's hard when you're writing a $100 million checks to empathize like that. Some of the entrepreneurs haven't done this before, so they don't know what those companies look like."