Lagged Deals and the Dynamic Nature of Venture Capital Databases

Venture capital databases are not perfect. One of the key problems is their dynamic nature. New information is coming in all of the time. Early-stage activity in particular is systematically lagged until additional rounds are raised (either because the earlier rounds were unpriced or because they were unannounced). For this reason, I try not to report data too recently from when the deals are to have occurred.

New Study on Women Founders

Last week, I published a new report for the Center for American Entrepreneurship, titled The Ascent of Women-Founded Venture-Backed Startups in the United States. The study is the culmination of months of research and collaboration with some amazing friends at the National Center for Women & Information Technology and beyond.

Student Loan Debt is Killing American Entrepreneurship

Ethan Mollick, a professor at the Wharton business school, Tweets about a paper that causally links student loan debt with declining entrepreneurship in America (including in high-growth, high-tech activities). By exploiting two “exogenous shocks” to the student loan system (public policy changes that are unrelated to entrepreneurship), the authors demonstrate that student loan debt not only causes individuals to start fewer businesses (especially in the high-tech, high-growth segments), but when they do, they are (a) less likely to be successful, and (b) experience greater hardship from the (already more likely) business failures. These are not exactly the type of conditions that encourage people to start new ventures, particularly when competing in a harsh competitive environment of increasing market power, raising incumbency advantage, and expanding wage opportunities at larger companies.

Robert Noyce, Mao Zedong and Lessons for Startup Communities

In 1957, a group of eight Silicon Valley executives lead by Robert Noyce resigned from famed Shockley Semiconductor to start a rival in Fairchild Semiconductor. This sort of thing happens all the time in Silicon Valley today, but at the time, it was a watershed moment that sent reverberations throughout the industry. The Traitorous Eight, as they became known, changed the course of innovation forever by injecting the region with an entrepreneurial ethos that continues to this day and has made Silicon Valley the envy of the world.

Around the same time, nearly 6,000 miles (~10,000 kilometers) away, a very different type of revolution was taking place in Communist China. In 1958, Communist Party Chairman Mao Zedong launched the Great Leap Forward—a wide-sweeping series of economic and political reforms aimed at transitioning China from an agricultural economy to an industrialized one, and at consolidating power around the socialist regime.

So, why on earth am I linking the Great Chinese Famine with the essence of Silicon Valley’s entrepreneurial spirit and with startup communities today?

The J-Curve of Startup Community Transition

In The Startup Community Way, my upcoming book with Brad Feld, we explain that startup communities must be viewed through the lens of complex adaptive systems. Such systems are characterized as having many elements (people and things), interdependencies (connections between them), feedback loops (actions lead to reactions), and as being in a constant state of evolution (never at rest).

We make the effort to explain the complex systems framework and tie it to startup communities because the nature of these systems requires a very different type of engagement than we are used to in most of our professional and civic lives. Complex systems require different skills (diversity v. expertise), mental processes (synthesis v. analysis), tactical approaches (experimentation v. planning), and goals (right conditions v. right outcome), among other factors we discuss in the book.

One of these prominent conditions in complex adaptive systems that I want to talk about today is Basins of Attraction. In neoclassical economics, it is assumed that the the economy (also a complex adaptive system) is moving towards a point of stability—an equilibrium. This is done for reasons of simplifying mathematics, but it also has the impact of making many economic predictions unreliable.

Instead of a single point of stability, Basins of Attraction takes the view that there are many such potential “resting places” and that a complex evolutionary process will determine which of these wins out. Basins of Attraction in complex systems—like startup communities—can be thought of as a sort of center of gravity where things can get stuck. Critically, they can get stuck in “good” or “bad” outcomes.

The Rise of Global Startup Investors

Recently, Brad Feld and I have been working hard on The Startup Community Way, a book on how to harness the complexity in the entrepreneurial age. It’s a follow-up to Brad’s, 2012 classic: Startup Communities. We completed a chapter that documents the growth of startup activity globally over the last decade—from startup deals to investors to startup programs—but recently decided to scrap it from the book. But, we wanted to put those data points to use, so I’ll publish some of them here.

(Note: if you want a comprehensive look at trends of venture deals, see Rise of the Global Startup City: The New Map of Entrepreneurship and Venture Capital, a report I published last September with my friend and colleague Richard Florida. It covers a decade of venture capital deals across more than 300 global metropolitan areas that span 60 countries.)

Here, I’ll document the rise of three types of investor groups: venture capital firms (from Seed through later-stage VC), corporate venture capital groups, and a third group for accelerators and incubators. These groups have been pre-populated by PitchBook, my source in this analysis.

Time to Exit

I’m currently putting the finishing touches on a new study about women-founded venture-backed companies in the United States. One of the things I looked at is exit rates—the share of companies either being acquired or doing a IPO—by the gender composition of founding teams. A colleague who reviewed a draft of the study challenged me on the eight- and ten-year exit lag from first financing because the time to exit has gone up in recent years. That’s a fair point, but I only have data going back to 2005 (the oldest first-financing cohort in my data), which constrains my ability to look over longer time periods. It is still an important exercise, and most critically, the results of the comparative analysis between women-founded and non-women-founded companies wouldn’t change much by having more data. And, that’s what I’m most after in the report.

But that did get me to thinking: just how much longer is it taking for venture-backed companies to exit?

Startup Communities Are Not Like Recipes, They are Like Raising Children

I’ve often heard people say “building startup communities (or startup ecosystems) is not about the ingredients, it’s about the recipe.” What they mean is that a focus on the individual people, institutions, and resources will provide only limited insight or success, and that what matters most is how these things all come together. While integration versus elements is the right concept, a recipe is the wrong analogy.

Back and Ahead

I started out 2019 on the blog by looking back at last year: my posting activity, traffic patterns, and which posts were the most popular. I posted 29 entries last year, which is around 2.4 per month or about one post every other week. The maximum was 6 posts (in November) and in three months I wrote nothing (in June, July, and September). The median was 3 posts.

I’d like to be much better about posting this year—not just frequency but consistency. I write on a number of other platforms and am working on a few major projects right now—including crashing towards a deadline for a book manuscript. I also tend to write lengthy and analytical (data-driven) pieces, which means it simply takes longer to produce content (did I mention already that I’m pretty busy doing other things?).