Are Insider-Led Rounds Good or Bad?

All figures from PitchBook.

Insider-led rounds (ILRs) are defined as new financings for startups that are led by existing investors.

In 2022 YTD (up to November 7th), ILRs accounted for 23.8%, or $51.3 billion, of the total capital invested in US VC, almost double the 2015 figure. Disregarding the 2021 breakout year, 2022 YTD ILR activity is already ahead of 2020 figures, indicating overall positive long-term growth of ILRs.

The increased participation of capital within ILRs is the result of several factors, including the continuous increase in funds with larger amounts of capital to put to work, along with the increase in startup deal sizes. In addition, ILR is a way to reduce equity dilution of and gain influence over the startup’s operations through board positions.

However, an important question remains: are insiders pushing up round sizes to their own benefit (by propelling unrealized gains in the near term) or are they simply doubling down on their best investments and making sure they have a healthy runway to reach their next milestone?

So, let’s put some numbers in order to answer the above question.

* Insider and non-insider median valuation step-ups have been more or less equal since 2012, suggesting that the influence of existing investors on startup valuation step-ups is small

* However, ILRs had a median deal size of $14.1 million, nearly triple that of the non-insider-led round median of $5.5 million (2022 YTD), suggesting that existing investors have a better capability to attract more investment interest

* Moreover, the returns profile favors insider investors since Series B rounds, reaching a Series E annualized return of 22.4% compared to the non-insider-led annualized return of 15.8%

Conclusion

The recurrence of VC rounds led by insiders is a key metrics for Fabrica Ventures.

We recognize that insider investors play a crucial role on VC returns since they tend to back their strongest portfolio companies through their private life cycle.