U.S. Venture Deal Activity during the COVID-19 Pandemic

Last month, I published an analysis of venture deal activity in the United States during the COVID-19 pandemic, which demonstrated that despite early warnings of an impending collapse, the pace of venture deal activity in the first half of 2020 was more or less on par with 2019. I concluded that many early observers failed to appreciate the ability of venture capitalists to adjust to a virtual environment and some analysts undercounted real-time deal activity by failing to account for the systematic reporting lags in venture capital databases—as a result, they hastily drew conclusions that have not withstood the test of time. I demonstrated that with a few small adjustments, the real-time data pointed to a venture economy that wouldn’t miss a beat this year.

We now have fresh data to extend that analysis. It shows that after a slight dip in the second quarter, venture deal activity (adjusted for the systemic data lags) rebounded in the third quarter to a level that was about the same as the first quarter. In fact, through the first three quarters of the year, 2020 is on pace to be the most active year for venture deals since the Dotcom era peak in 2000.

I Have to Believe Every Single Word

Trey Anastasio is the guitarist and frontman for Phish—a jamband originally from Vermont that has been going strong since 1983. Phish’s trademark is its improvisational style and unique sound that ensures each show is different from the next. This approach has led to an adoring fan base that follows the band from city-to-city each tour. I’m one of them. My time with the band dates back to 1997 when I was still in high school. I believe that Phish is the greatest rock band in history and Trey is the greatest living guitarist. But my love of Trey and Phish is not what this post is about.

5 Questions with Ian Hathaway, co-author of The Startup Community Way

01. What is “The Startup Community Way”?

The Startup Community Way is a book I co-authored with Techstars cofounder Brad Feld. It’s a collection of frameworks, principles, and action points that guide and inform practitioners and observers about the key characteristics, behavioral patterns, and basic function of startup communities and entrepreneurial ecosystems. Our thinking is supported by the science of complex adaptive systems, which explains the behavior of inherently unpredictable, emergent phenomena. We apply insights from systems thinking and community-building across many contexts to enable better engagement and more productive outcomes for entrepreneurs.

The Startup Community Way: Five Lessons for U.S. Policymakers

This article originally published on the Center for American Entrepreneurship Ideas Blog

My new book with CAE Advisory Board member Brad Feld published yesterday. The Startup Community Way: Evolving an Entrepreneurial Ecosystem is essential reading for entrepreneurs, community leaders, policymakers, and other key stakeholders looking to entrepreneurship as an engine of innovation and economic growth. As more cities, regions, and nations embrace entrepreneurship, it is widely recognized that the environment in which a startup operates plays a role in the likelihood of its success. For this reason, the topic of “entrepreneurial ecosystems” has begun to play a bigger role in many economic policy agendas.

The Startup Community Way: Evolving an Entrepreneurial Ecosystem

After three eventful years, I’m excited to say that my new book—The Startup Community Way: Evolving an Entrepreneurial Ecosystem, with Brad Feld—is officially available to the public today! It’s my first book, so this is a new feeling. It’s hard to put into words how grateful I am for the experience. I learned so much in the process and developed a large number of meaningful relationships along the way that will last a lifetime. It wasn’t always fun; writing a book of this nature is really hard work. But it was worth it.

I believe that Brad and I have created something that will be useful to many people, not just in entrepreneurship and community-building, but far beyond. Our book is not the final say on the topic of startup communities; it’s the beginning of a conversation. There is more work to do and many other voices to hear from. Like with startup communities, the work is truly never finished. But, I believe we have provided a solid foundation from which many people can benefit and build upon for years to come. I’m proud of our work.

40

Today I turn 40 years old.

Kind of an odd-feeling thing to write out and have staring back at me. It’s something I’ve been looking up at my whole life and now it’s finally here. I’m not big on celebrating my own birthday, but this is an important one. I’m going to honor it. And despite the limiting circumstances we’re all facing right now, I’m going to enjoy it. Needless to say, my day is going to look very different from what we originally planned. We’re not on the beach in Mexico. And that’s ok. I’m right where I need to be.

Acceptance and The Narrative Fallacy in the Times of COVID-19

In the last week, I’m witnessing an acceleration in what I’ll call “The COVID Struggle,” or more simply, “The Struggle.” Many people are having a hard time dealing with and accepting the reality of life under a global pandemic, and are lashing out against this constrained way of living in ways big and small. They desperately want things to go back to the way they were before, so they pretend that everything is fine—that life as we knew it can resume with minimal further disruption.

But life is nowhere near returning to normal anytime soon. I’d say at best, we’re a quarter of the way through this thing. This is unsettling, which is why people are rejecting reality. Without strong leadership in place as a check on human impulses (selfish, short-term), the situation worsens and the whole episode drags on. The suffering elongates. It’s a self-reinforcing feedback loop.

The Measurement Trap

Mariana Mazzucato is one of my favorite economic thinkers. She’s an academic economist who rejects market orthodoxy and presents her arguments, persuasively, to the masses—a gift that many in her field don’t possess. Mazzucato’s overarching argument is that (a) the state’s role in driving innovation, and therefore economic growth, is much larger than is reflected by market reward mechanisms, and (b) a primary reason for this lopsided arrangement is the flawed way we value a range of inputs to production.

On this latter point, Mazzucato argues in a recent New York Times Op-Ed:

Essentially, only something with a price is valuable. This approach overvalues goods and services with a price tag — which in turn make up a country’s gross domestic product, the driver of public policy. This has perverse effects. A coal mine that spews carbon into the atmosphere increases G.D.P., and so is valued. (The pollution it causes is not taken into account.) But the care given to children by their parents at home doesn’t carry a price, and so is not valued.

Since I have the topic of entrepreneurial ecosystems at top of mind, I immediately went there after reading this quote. It reminds me that what gets valued in entrepreneurial ecosystems tends to be the tangible factors that can easily be counted, like the amount of investment capital or the number of startups, instead of the intangible factors that more fundamentally drive system value, such as social capital or tacit knowledge.

Sleep

On Friday night, I got eight consecutive hours of sleep. It’s been a long time since that last happened—months and possibly longer. I woke up feeling great. The stressors I’ve had stemming from Covid-19 related fallout and a bunch of other things were washed away immediately. I was full of energy and had an incredible weekend with my family. All from just one night of great sleep.

I have two wonderful sons. I love everything about them. The problem is, they’re both terrible sleepers. That fact, combined with some conscious choices my wife and I make about how to parent, means that we have been experiencing sustained sleep deprivation for nearly four years. I’ve probably slept as well as I did on Friday no more than a dozen times since my oldest was born in 2016.

The impacts of my lack of sleep are piling up. I’m exhausted and it’s taken a toll. It took just one night to wake me up to the reality of how badly I need to get better sleep (see what I did there?). Now I wonder: is much of my stress reducible to this one problem of not getting enough sleep? Maybe so.

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The Geographic Concentration of Venture Capital(ists)

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Last week, The New York Times published an article arguing that a “wave of venture capitalists is heading to quieter, less-expensive locales, where they are helping fund start-ups.” The article supported this claim by pointing to three venture capitalists who left Silicon Valley and launched funds in other places. One of them, Mark Kvamme, left Sequoia Capital to found Drive Capital in Columbus, Ohio; but that was back in 2013.

I don’t doubt that some venture capitalists have left The Valley to start funds elsewhere. However, The Times is massively overselling the reality. It is already well-advertised that venture-backed startups (the recipients of venture capital) are highly concentrated by geography. However, venture capitalists (the ones investing in startups) are concentrated by geography even more. Let’s take a look at the data.

Call for Input: Local Policies to Support Economic Development via Entrepreneurship

This is a call for input for a brief survey on local policies or programs to support startup community development. I use the term "policy" loosely to mean actions not just by governments, but also by additional actors involved in provisioning "public goods" or funding for local entrepreneurship (e.g., economic development agencies, foundations, chambers of commerce, non-profits).

The New Business Preservation Act and the Tradition of U.S. Federal Government Support for Entrepreneurship and Venture Capital

Earlier this month, a group of U.S. Senators led by Amy Klobuchar introduced the New Business Preservation Act to incentivize venture capital formation around the country. The Act, which allocates $2 billion to states under the “Innovation and Startups Equity Investment Program,” enables investors in undercapitalized regions to leverage federal dollars into startup investments. It avoids two well-known traps for government-sponsored venture programs by requiring that public funds are matched with private dollars and that capital is deployed by professional investors.

Then, All at Once

Last Sunday I hit send on my first book manuscript for review by the publisher. It’s been nearly three years in the making, full of twists and turns, a roundtrip Transatlantic move with my family, tens of thousands of discarded written words, and two hiatuses totaling twelve whole months in length. It’s been a long time coming and damn does it feel good to finally see the light at the end of the tunnel.

If you don’t know already, it’s a book on entrepreneurial ecosystems co-authored with Brad Feld. We use the concept of complex adaptive systems to explain the behavior of startup communities and entrepreneurial ecosystems. A defining characteristic of complex systems is a process known as emergence. This occurs when the “parts” of a system interact in a way that produces value in novel and unexpected ways. Nobody is in control and the ultimate outcome is difficult or impossible to predict in advance.

The Myth of the Young Startup Founder

In February 2004, Mark Zuckerberg famously launched Facebook from his Harvard dorm room at the age of 19. By that summer, Zuckerberg moved himself and the company to Silicon Valley and never looked back.

Over the next eight years, Facebook would attract half a billion users and nearly $7 billion in venture capital investment, on its way to a May 2012 IPO that valued the company at more than $81 billion. Today, Facebook has more than one billion users and is worth more than $500 billion. Zuckerberg is still CEO, and at 35 years old, has an estimated net worth of $65 billion—making him the eighth richest person in the world.

It’s a fascinating story. So fascinating in fact that Hollywood made a feature film about it called The Social Network. And while the story of Mark Zuckerberg and Facebook has undoubtedly inspired an entire generation of young entrepreneurs and reshaped their imaginations about what’s possible, people too easily forget that a big part of what makes the story compelling is that it’s so unusual. Mark Zuckerburg is not only an outlier—he’s an outlier among outliers.

Europe's Venture-Backed IPOs and American Exchanges

Last month, my friend Nicolas Colin, a Director at The Family, described Europe’s tech IPOs as “boring” in a newsletter. Among other points, Colin argues the need for a deeper ecosystem that links Europe’s entrepreneurs with capital markets. Large IPOs are a big part of this. A debate over the veracity of Colin’s claim spilled into social media, which focused more so on what one considers “boring” than anything else. Word choice aside, I presume that by “boring” Colin meant “small.” On that, he has a point. In both a game of averages and outliers, many of Europe’s most valuable startups have in fact looked to American exchanges for public listings.

How to Tell if You Have Product/Market Fit

This is a debate that will never be settled. Plenty has been written about how to define product/market fit. The consensus seems to be: (a) it’s generally easier to identify when you don’t have it, and (b) when you do, it’s hard to objectively point to why. It’s just a hunch. A feeling.

But, let me propose another way of thinking about it, which comes from my good friend Nicolas Colin of The Family. Nicolas takes a very different approach to helping people thinking about when product/market fit is or isn’t happening, using a story from politics.

Hidden First Rounds

One of the drawbacks of venture capital databases is that they are dynamic. Information trickles in, often with significant time lags. This is especially true at the earliest stages, where rounds are often unannounced and many startups are too small for anyone to notice. It’s a structural challenge that I’m not sure will ever be fully resolved.

The underreporting and time lags associated with very early deals has become further compounded in recent years. Many startups in Silicon Valley and other leading startup hubs have increasingly relied on unpriced rounds (SAFEs or convertible notes) for their first or even second rounds of financing. Because these rounds are unpriced, they don’t appear in a company’s cap table until after it has raised a priced round later (and further, announced the deal—see above).

Combined, there are structural and cyclical reasons that the underreporting of very early venture rounds is especially acute now and fraught with severe reporting delays. This matters because people want to understand the market trends in near real time.

What Does Your City Say?

This morning a friend reminds of a Paul Graham article from 2008 titled Cities and Ambition. It’s excellent. For those of you who don’t know, Paul is the outspoken founder of Y Combinator—a prominent early-stage startup investor in Silicon Valley.

The general thesis of Paul’s article is simple yet elegant. Cities speak to us. They influence our behavior. They shape who we are. It matters where you live. A lot I would argue.