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Is bigger better? Early mega-rounds help startups on key targets.

As more venture-backed startups land mega-rounds of $100 million or more, the trend has fueled an ever-growing debate: Do massive early-stage VC checks help or hurt fledgling startups?

Highly funded horror stories make for great headlines. Car-subscription company Fair, which received $386 million in a Series B led by SoftBank in 2018, recently laid off 40% of its workforce. And CapitalG-backed UiPath also confirmed a significant downsize less than two years after hauling in $153 million in a Series B.

But venture capital firms like TCV, Andreessen Horowitz, Norwest Venture Partners and Founders Fund all loaded up new funds with more than $1 billion this year, signaling an appetite for ever-larger deals.

The investment strategy is more substance than hype, according to a PitchBook analysis.

US startups that raised Series A or B rounds of $100 million or more were more successful in raising subsequent rounds, the data showed. And they were far more likely to go public than their lesser-funded peers—15% of the mega-round group achieved that milestone, compared with just 2% of other startups. Companies that raised mega-rounds in the early years were more likely to achieve any kind of exit, and did so about a year earlier than other startups.

The data suggested one bright spot for the lesser-funded group: They were nearly twice as likely to be acquired.

Supersized financing rounds were once a rarity, but it's now relatively common to see early-stage startups land gobs of venture capital financing. In recent years, mega-rounds have spiked and now comprise more than 2% of all Series A or B rounds.

Large stockpiles of capital give young companies the ability to grow, but some argue that the high expectations and unchecked spending can hurt a startup's prospects. In a recent blog post titled "Bigger Isn't Necessarily Better," Union Square Ventures co-founder Fred Wilson called into question the performance of heavily funded startups, suggesting that unnecessary cash can weigh companies down. Wilson did not respond to a request for comment.

Venture capital firms may need to write larger checks earlier if they want to fund successful tech companies in more traditional industries like manufacturing and logistics, said Lior Susan, a founding partner at Eclipse Ventures. Susan led the firm's first mega-round investment last year in Bright Machines, the creator of a manufacturing and robotics software platform.

"A lot of the industries that we are playing in require some sort of scale just to get the customers," Susan said. "It requires significant capital to support that type of growth."

Biotech startups also frequently require huge sums to get off the ground. "To go after gene therapy and cell therapy or engineered cells, that's a big task. It takes a lot of capital," said Robert Nelsen, managing director of ARCH Venture Partners. Lyell and Sana Biotechnology, which are backed by ARCH, both raised early-stage mega-rounds this year.

For the analysis, PitchBook looked at the outcomes of 84 businesses that received mega-rounds in a Series A or B, as well as more than 10,000 startups that received smaller rounds. All of the companies received their first round of financing between 2008 and 2015.

The findings don't appear to be a recent phenomenon. Startups that were first financed between 2002 and 2007 showed similar trends, with mega-round startups more likely to achieve subsequent rounds and IPOs, and less likely to be acquired.

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