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Silicon Valley venture capital firms, long the kings of tech financing, are getting outplayed on their own turf.

Their new competition? Lumbering, old-school mutual and pension funds. Armed with seemingly endless capital, these institutions have stormed Northern California this year, throwing record-smashing cash at start-ups, and new data reveals just how intense the pressure has become for VCs.

"Speed Dating But More Extreme"

While they're the old guard in most areas of investing, hedge funds, mutual funds, pensions, and sovereign-wealth groups are labeled "nontraditional investors" in Silicon Valley.

And in this case, the designation makes sense. Their recent emergence as investors in the technology sector has certainly turned tradition on its head:

  • Such nontraditional investors were involved in 42% of start-up financing deals in the second quarter (their highest share ever), and accounted for 75% of all capital invested.
  • Investment in U.S. start-ups in the first half of the year was $150 billion, more than any year before 2020 and on pace to nearly double last year's record total.

"It's like speed dating but more extreme," Peter Fishman, co-founder of data-automation start-up Mozart Data, told The Wall Street Journal of the new influx of investors.

Turning The Tables: Emboldened by the considerable cash being thrown around, many start-ups have done away with their pitch decks and are asking for capital directly, along with favorable preconditions. And the number of major deals inked this year reflects that shift in bargaining power:

  • From 2016 through 2019, there were 35 funding deals every month of $100 million or more, according to CB Insights. In 2021, there have been 126 deals per month thus far.
  • And just five years ago, 14 start-ups were valued at $1 billion or more in the second quarter. This year, there are already 136.

Standards Schmandards: "There are no VC funds with pricing discipline. All of us have caved," venture capitalist Keith Rabois tweeted, suggesting that to keep pace with big institutional investors, VCs are throwing caution to the wind by cutting back on audits and due diligence before shoving cash at start-ups.