New venture capital and angel funds are forming quickly and easily. Veteran VC firms now face newfound competition for deal flow.

In order to remain competitive, some of these very large, seasoned funds will often inflate the valuation of a startup they really like to prevent smaller, emerging funds from competing for investment.

When this happens, there are negative, downstream effects that impact funds and startups of all sizes.

For example… Let’s say that Mega Fund has $1B to invest and Emerging Fund has $50M to invest.

• Both Mega Fund and Emerging Fund like ABC Corp and want to invest in ABC Corp.

• Mega Fund can commit capital to ABC Corp at a premium valuation and not deplete their $1B whereas Emerging Fund doesn’t have that luxury.

• So instead of a deal at ABC Corp’s $10M valuation, Mega Fund can structure terms where ABC Corp is valued at $35M making it harder for Emerging Fund to compete.

• Additionally, Mega Fund can put up more capital on a $35M valuation, negotiate a larger stake and keep other investors like Emerging Fund off the cap table.

• Emerging Fund loses out on the ABC Corp deal to Mega Fund, but Emerging Fund still likes the space where ABC Corp competes.

• Six months later, a comparable company to ABC Corp called XYZ Corp raises money.

• XYZ Corp is worth roughly $15M; but, since ABC got terms on a 3.5x valuation six months earlier, XYZ can demand a premium on their company at a valuation of $40M.

• The inflated values of ABC and XYZ hurt Emerging Fund’s return potential as a result.

Larger valuation DOES NOT EQUAL better startup.

And, the larger deals get, the harder it is to spot value.

Funds of all types — especially smaller, emerging funds — benefit from AMOS because AMOS provides objectivity and neutrality to startups’ exit likelihood, not valuation.

AMOS does not consider whether a company is over-valued or under-valued; it only considers how likely a company is to exit (See the AMOS report on Bird as an example).

AMOS brings neutrality to startups’ exit likelihood which is beneficial for investors and funds of all sizes.