New Trend In Venture Capital: The Discovery Round

Guest post by Jennifer Vancini, General Partner, Mighty Capital

If you follow venture investing or startups, you may have noticed how much more activity there now is in the early stages of company building. There used to be an orderly progression from Angel (or self-funded) origins in product creation, to the early company-building money of Seed Stage funding, and finally to the growth- and maturity-oriented alphabet rounds of Series A, B, C, and so on. Now there are more intermediate steps as companies grow.

At Mighty Capital, we call “Discovery” that Post-Seed or Pre-A step to acknowledge the formalization we’re seeing of this round. Here’s what’s going on.

The intermediate rounds may at first have seemed like a temporary phenomenon, brought on by low interest rates, or money from the public markets seeking a new investment, or the bigger metrics required to raise a Series A, or just a gimmick. In fact, the new rounds are the financial expression of an important change in the way young companies create products, find customers and refine their value proposition, and can grow more quickly and efficiently than in the past.

If we’re right, this has implications not just for early-stage investing, but for the future behavior of companies of all sizes.

In another post, my cofounder SC Moatti wrote about the rise of connected products, and hence the rising importance of Product Managers within the corporate hierarchy. It’s a central part of our investment thesis at Mighty Capital, and so far we’re very pleased with the results that it’s yielding.

Connected products, which have a more sophisticated online relationship with customers, develop tighter feedback loops, generating attributes faster, and developing healthier processes of learning and product improvement. It was an emerging phenomenon before COVID-19, but because of the pandemic the transition to online work and commerce (including even more connected products) collapsed years of growth into a short time, with lasting impact.

It turns out this isn’t the whole story, though. The new product-first orientation at these companies makes them voracious consumers of the new business efficiency software that has come into its own in the past several years. These products automate in part or entirely many critical aspects of early corporate growth, including product design, sales and marketing, corporate workflows, HR, and more.

They also make increasing use of data feedback loops and Artificial Intelligence in ways that resonate with the new product-first startups, and may mean as much or more for the cost and efficiency of young companies as cloud computing did 15 years ago.

Because of the cloud, companies like Airbnb (in our portfolio) and others, didn’t need to buy lots of servers, and then spend unproductive time setting up and maintaining their own computers; they could instead envision and build complex online services that drew on Machine Learning, social media, and online payments.

Now, young firms can focus on the customer-product relationship, without excess engineering, sales, marketing, finance, channel-building, and back-office teams, at a time when they need to be very capital efficient with their limited resources. New testing tools for writing code and ensuring security compliance also help young companies do more.

To be clear, this doesn’t mean that all those jobs are going away. More likely, they will be filled by people in more sure and efficient ways, without the waste we’ve all seen as young companies struggle to grow, hiring and firing people in the process of learning. In some cases, like the increasing use of part-time finance people, there are new people involved in the process earlier on.

The “discovery” in this new Discovery round is discovering the real ROI of the product, the company’s value proposition, and its likely path to high-velocity growth. That way, companies can arrive for their next round of funding with more evidence of what they mean for their customers, and where they most need funding. It may even reduce the need for a lot of companies to raise a Series A and the rest of the funding alphabet before they get to escape velocity.

The overall objective is to create companies that can learn, fail, course-correct, and grow faster than ever. Founders at product-first startups also access far more sophisticated and cheaper analytics than in the past. They are already building faster, changing things faster, and growing faster. It’s no wonder they are seeking tools that do similar work, and the makers of these tools are improving them at a healthy clip.

Bear in mind, today’s early-stage company is often tomorrow’s giant. They will bring these new tools and practices to the broader corporate world. People who work at these startups are getting accustomed to the new way of working and when they leave for larger companies they’ll take with them the habits of these tools. It’s just how cloud computing, and before that online documents and spreadsheets, spread from younger companies to the corporate mainstream.

It will be interesting to watch how Discovery Rounds change both the funding needs of the A Round, and the necessity of young founders to learn faster the “soft” skills of building a company culture, carrying out acquisitions, and communicating well with the investors, boards, and eventually the general public. Some things aren’t turning into software any time soon.

New rounds represent an exciting new phase in the changing nature of early-stage company building. SC and I, along with the rest of our team at Mighty Capital, are keen to participate in every stage of the process, where our unique investment thesis makes the most sense, and can play the most beneficial role to help founders realize their big ambitions.