Analysis

Silicon Valley VCs are investing more in European startups

Silicon Valley investors are growing increasingly interested in Europe. That’s the main takeaway from this Sifted Chart of the Week. Last year was a record year for fundraising by European startups with €20.5bn (£18.1bn) spread over more than 3,300 deals. And it came with an increasingly US flavour.

The 1% (of VC)

In the last year, I have written about the increasing size of venture capital deals across the round stages (see here, here, here, and here). Today I’ll take a closer look at that the top of the distribution by examining the share of venture capital dollars in U.S. startups captured by the largest one percent or five percent of deals each year.

The analysis shows that in spite of the impressive growth in venture capital deployment across all deal sizes in recent years, the biggest deals are driving the trend. The largest five percent of deals now account for more than half of venture capital deployed—twice as much was the case just a decade and a half ago. In the last few years, the trend has been driven entirely by the top one percent.

How venture capital mega-rounds obscure improving gender diversification of startup founders

Today, I’m going to publish headline numbers of venture capital investments ($) by founder-gender type. I’m doing this for two reasons. First, while my study provided some important new information, headline numbers of capital invested is what clicks in most people’s minds for “what’s going on” (I disagree). Second, I want to point out that looking at headline numbers of capital investments might obscure a truer picture of a diversifying founder base because giant funding rounds are dominating VC markets.

To test this idea, I pulled annual figures for venture capital deals and capital invested by round size (<$50M, $50M-$99M, $100M-499M, and $500M+) and gender dynamics of founders (women-only, mixed gender, and men-only). What my analysis shows is that mega-rounds ($100M+) are male-dominated and drowning out some promising gender diversification going on for companies in-line with historical venture capital activities.

Women-Only and Mixed-Gender Founding Teams are Driving New Venture-Backed Startup Activity

Two weeks ago, I published a new report for the Center for American Entrepreneurship, titled The Ascent of Women-Founded Venture-Backed Startups in the United States. I followed-up with a summary on this blog last week.

One criticism of the report is my definition of “women-founded”. For reasons I explain in detail in the report’s methodology, I chose “women-founded” to indicate a company that has at least one verified female founder. That means it includes startups with all-women founding teams and teams with both women and men (coincidentally, it also means that I assume that companies with missing founder information had no women founders—more on that in a second). A key reason for not separating these groups was needing a bigger pool of companies to draw from in order to credibly track outcomes over time—and there just weren’t enough of them in the mid-to-late 2000’s to do that. There were tradeoffs.

However, that does not prevent me from more narrowly segmenting these groups here and demonstrating first financing trends only across the four types of founding teams in the dataset—women only, men only, mixed gender, and missing gender. To begin, the first chart here displays the raw numbers of annual first financings for startups falling into each of those four founder-gender categories.

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.

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?

Early-Stage Valuation Multiples Are Coming Way Down. What Does it Mean?

Earlier this year, I wrote about the declining number of early-stage venture deals and in the number of startups entering the venture-backed pipeline in the United States. As I think about the overall health of American entrepreneurship, this development raises some questions. Is the early-stage decline driven by factors on the supply-side (investors) or the demand-side (startups)? Or is it both? Does it reflect an overheated market simply returning to normal, or are other factors at play? As one example, is this evidence of winner-take-all markets, whereby fewer startups get funded, but those that do raise ever more capital? Is it something else? Is it all of these things? And, should this concern us?

Platform Giants and Venture-Backed Startups

A friend recently pointed me to a July study by Oliver Wyman titled Assessing the Impact of Big Tech on Venture Investment. I was immediately intrigued because this is a question I’m asked all the time and one for which I don’t have a good answer. On the one hand, I see how platform giants could expand startup activity because they seed an ecosystem, improve labor quality, and provide capital (as customers, investors, and acquirers). On the other hand, I see how their sheer dominance—and the ability to leverage their power into adjacent markets by favoring their own content or wares—makes it difficult  to compete in their space. In fact, reporters have told me that most VCs won’t touch startups operating anywhere near these companies’ orbits, a phenomenon that is apparently so common it’s been given a nickname: “kill-zones”. I took a close look at the numbers to try and figure out what’s going on.

The Follow-On Funnel

Two weeks ago, I published a study for the Center for American Entrepreneurship titled America's Rising Startup Communities. The study looked at the growth and geography of venture capital first financings across U.S. metropolitan areas between 2009 and 2017. One of the biggest questions that's come out of that work is: "what's happening beyond first financings?" This post is the first of at least two that will begin to address that question. Here I will look at national trends, and in a later post, I will examine geography of follow-on investments.

The North Star

In the last couple of weeks, the subject of Canada as a rising startup and tech hub has been seemingly everywhere in my news feed. Much of discussion about Canada has focused on Toronto and Vancouver, and to a lesser extent Montreal (where Techstars is opening a new accelerator, one year after launching in Toronto). And that’s for good measure—these are far and away the leading hubs of startup activity in Canada.

But, I’d like to talk about another northern star that shouldn’t be left out from the discussion: Kitchener-Waterloo.

Where the really big venture deals are

I'm currently doing some research that will detail global venture capital flows. My co-author and I are observing some very large deals in the last few years that skew the overall numbers. These deals are emanating from two places—China and the United States. Interestingly, a relatively small number of companies seem to be driving overall venture capital investment in China, whereas the same is not true of the US.

Sizing up the largest Seed, Series A, and Series B deals

Two days ago, I wrote about a number of trends underlying venture capital deals the last few years. The short version: Today, I thought I'd go ahead and plot those deals. The charts below show the number of deals at the high end of three funding rounds (Seed, Series A, and Series B) between 2007 and 2017. It shows just how much bigger some of the largest deals within these round sequences has gotten.

High-growth firms of the Inc. 5000

High-growth firms of the Inc. 5000

Today, I have a new report out at the Brookings Institution titled "High-growth firms and cities in the US: An analysis of the Inc. 5000." The Center for American Entrepreneurship generously provided funding for the study and Inc. Magazine provided the data.You can read the entire report in more detail with the link above (it's a 15 minute read, max), but here are some takeaways.

Microdistilleries on the rise

Microdistilleries on the rise

Yesterday I wrote about the exponential growth in microbreweries during the last decade. The trend toward small business activity in the brewery industry is an interesting case study because the rest of the economy is moving in the opposite direction—with industry consolidation is on the rise and the rate of business formation near record lows. That got me to thinking: what other industries are experiencing a similar trend of substantial rises in small business activity over a short period of time? I crunched the numbers, and one industry noticeably stood out—distilleries

Craft breweries buck the monopoly trend

Craft breweries buck the monopoly trend

Mounting evidence of widespread industry consolidation has many worried about the future health of the American economy. Excessive industry concentration can have negative effects on innovationjob creationwages, and productivity—hallmarks of competitive markets with many startup companies. But, there is at least one intriguing exception to this trend: microbreweries. I dug into Census Bureau data to find out the magnitude of this trend—looking at brewery industry business counts and employment by firm size.