Scott Galloway says a tough road for ‘second-tier VCs’ is good news for startup founders raising money: ‘It’s a great time to be a seller.’

Scott Galloway, NYU Stern professor founder Gartner L2 ignition 2018.JPG

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Scott Galloway believes there are two tiers of venture capital firms.

Tier 1 comprises the elite VC firms, like Sequoia, Andreessen Horowitz, or General Catalyst, which just led the $30 million Series A that Galloway’s startup Section4 raised.

Below them, Galloway says, is Tier 2 — investors who hit big years ago at an elite firm and left to start their own.

“And there’s no shortage of them,” Galloway told Insider. “It creates a hallucination toward LPs [limited partners] that they’re a great VC.”

But Galloway, an entrepreneur and NYU marketing professor, believes the path forward for many Tier 2 VCs won’t be easy since they’re getting squeezed from competition above and below.

For starters, they now have to compete with the increasingly unconventional ways that startups are raising money such as crowdfunding, rolling funds and other digital innovations. Just this Monday, the SEC raised limits on how much a young company can raise in securities crowdfunding, boosting the amount to $5 million from $1.07 million.

“It disrupts the Tier 2 VCs, since there are more alternative methods of financing,” Galloway said.

On the other side of the coin, Galloway says that many companies still seek funding from a Tier 1 VC — even agreeing to less money at a lower valuation — just for the credentials and industry recognition.

Both factors work to “create more strength and power to Tier 1,” Galloway said, “and the tier 2 VCs may go away.”

However, what isn’t going away is all that VC money, Galloway said. His advice to startup founders: Raise money. And right now, more money than you actually need.

“We’re going to see a lot of capital flow to smaller companies and entrepreneurs,” Galloway predicts. “It’s a great time to be raising capital now as more bigger deals are happening.”

It’s also a great time for founders to stay put in the private markets. “What companies are raising is what feels like the public market,” Galloway says of startups able to fundraise differently now. “There are hundreds of millions of dollars that used to be in public markets that’s now done in the private markets.”

And Galloway wants founders to capitalize on that. His biggest piece of advice to anyone holding an asset in 2021 is to sell.

“I would advise anyone that owns an asset right now, whether it is an NFT piece of digital art or an entrepreneur of a private company raising money, is to sell,” Galloway says. “It’s a great market to be a seller.”

SEE ALSO: Angel investor Sahil Lavingia is bypassing traditional VCs with a $5 million crowdfunding round for his own startup, selling stakes for as little as $100

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