Q3 2021 Quarterly VC Update: Merritt Hummer on the State of Venture Capital Investing

In conjunction with our Q3 Venture Financing Report, I sat down with Merritt Hummer of Bain Capital Ventures to get her take on the state of venture capital investing.

Key insights from Merritt Hummer

On valuations and later-stage investments: “As a growth investor, I believe the valuation environment puts a bigger onus on us to make the right calls on investments. … We have to make sure we are picking winners who will grow into and beyond their valuations.”

On the Bain Capital Ventures platform: “Everyone on the Bain Capital Ventures team is laser-focused on one or two sectors. … Because we spend a lot of time in our areas, we like to think we can disproportionately support and contribute to the success of our portfolio companies.”

On embedded marketplaces: “We believe that the future of vertical SaaS will be defined by embedded financial services and embedded marketplaces. … We are seeing embedded marketplaces pop up everywhere – in software for construction, spas and salons, restaurants, financial institutions … the list goes on.”

Figures for Q3 deal volume and value are slightly lower than recent prior quarters, but still robust. How does your experience in the market compare, and what direction do you think market activity is trending toward as we head into the end of the year?

The data surprised me because it didn’t feel like the pace of deal volume slowed down in Q3. If anything, September felt like the busiest month all year. However, in looking at the data, I think the fact that valuations continued to climb in Q3 made it feel like the market was hyperactive, even though deal volume and deal count slowed down in reality. I expect we will see a continued slowdown in Q4 as we enter the holidays. Many investors and founders have had a productive, exhausting year, and a lot of people probably want to take a break!

Our data points to significant valuation increases in Series A and B rounds. Are you seeing similar numbers in the market? How is this trend impacting later stage investments?

Yes, this comports with our observations in the market. A few years ago, it was possible to invest in a Series C of a good company under $200 million post. That feels impossible today.

A few things jump out at me from the Cooley data. First, growth-stage valuations have been marching upward for years. This isn’t really a new phenomenon. However, this trend line inflected post-COVID, and the jump in growth-stage valuations has been higher on a dollar and percentage basis than the jump in early-stage valuations. As a growth investor, I believe the valuation environment puts a bigger onus on us to make the right calls on investments. There is less room for error at these valuation levels. We have to make sure we are picking winners who will grow into and beyond their valuations.

As an affiliate of Bain Capital, what makes Bain Capital Ventures different than your traditional VC firm? How are you evaluating potential investments and leveraging your platform for existing portfolio companies?

A core tenet of our investment strategy is that we are domain-centric. Everyone on the Bain Capital Ventures team is laser-focused on one or two sectors. I spend all of my time in fintech and ecommerce infrastructure/B2B marketplaces. Bain Capital broadly is organized in a similar way because we believe in focus and domain expertise. Our platform outside of the investing team is designed to support the verticals where we focus, too. On our fintech team, for instance, we have two operating partners who bring decades of operating experience to our portfolio companies. We host events for founders and operators in the fintech ecosystem. We publish our investment theses and thought pieces focused on our verticals. Because we spend a lot of time in our areas, we like to think we can disproportionately support and contribute to the success of our portfolio companies.

Your concept of “embedded procurement” as the next wave of how businesses will purchase items is fascinating and aligns with how B2B services continue to evolve. Are you seeing a significant rise of startups developing software to facilitate these services? Are there any specific subsectors of business that will benefit most from this technology?

The concept of embedded marketplaces is an important thesis for us right now. We believe that the future of vertical SaaS will be defined by embedded financial services and embedded marketplaces. An embedded marketplace is a marketplace built on top of a vertical SaaS application that enables customers to order supplies and services directly from the software they use to manage their business. We are seeing embedded marketplaces pop up everywhere – in software for construction, spas and salons, restaurants, financial institutions … the list goes on.

Because the monetization opportunity with embedded financial services and embedded marketplaces is so immense (much larger than the SaaS revenue opportunity generally), we believe that vertical software will increasingly be given away for free as a hook to acquire customers. Those customers can be monetized through their procurement of financial services, goods and other services on the platforms.

What’s most exciting to us about this trend is that it is universal (cross-vertical) and global. Vertical software has proliferated every industry under the sun. As an extension of vertical software, embedded marketplaces will do the same.

One key takeaway from our data is that deal terms continued a company-friendly trend. How does that trend impact your thoughts on how to approach the market as an investor?

Founder-friendly terms aren’t new to us. The best founders in any environment can command founder-friendly terms. We seek to partner with founders who typically have lots of options and, therefore, we generally propose very clean terms in our investments.

Any other observations on this quarter’s VC data worth noting?

My favorite data point is that 97% of Q3 deals were up rounds!

About Merritt Hummer

Merritt is a partner at Bain Capital Ventures. She joined the firm in 2018, and focuses on growth equity investments in fintech, proptech, and commerce tech (including B2B marketplaces) in the US and Europe. Merritt led BCV’s investments in Socure, Properly, Pleo, Material Bank, SmartRent, Ankorstore and Collectable, and she worked on investments in Recharge Payments, Mirakl, GoCardless, Finix and Ribbon.

Before joining Bain Capital Ventures, Merritt was a growth equity investor at Goldman Sachs and began her career as a management consultant at Bain & Company in New York. Merritt graduated cum laude from Princeton University with a Bachelor of Science in Engineering degree, and from Harvard Business School, where she was a Baker Scholar.

Merritt grew up in Chicago, Illinois. She lives in New York City with her husband and her daughter, Sienna.

About Bain Capital Ventures

Bain Capital Ventures partners with disruptive founders to accelerate their ideas to market. BCV invests from seed to growth in startups driving transformation across industries, from SaaS, infrastructure software and security to fintech and healthcare to commerce and consumer tech. The firm has helped launch and commercialize more than 365 companies, including Attentive, Digital Currency Group, DocuSign, Flywire, Jet.com, LinkedIn, Redis Labs, Rent the Runway, SendGrid, and SurveyMonkey. BCV has $9.2 billion in assets under management with offices in San Francisco, New York, Boston, and Palo Alto. Follow the firm via LinkedIn and Twitter.