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.
What's driving the increase in average venture capital deal sizes?
Earlier today, I saw a post that showed average venture capital deal sizes increasing across the round sequences. I wanted to find out what is driving these trends, so I dug deeper into the data. It shows that digging into the underlying data on deal size distributions contains rich insights.
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
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
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 innovation, job creation, wages, 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.
Immigrant-owned businesses are fundamental to American cities
Earlier this week I read Tech and the City: The Making of New York's Startup Community, by journalist Maria Teresa Cometto and venture capitalist Alessandro Piol. Among many other things, they describe how a preponderance of immigrant-run businesses is attractive to foreign-born high-tech entrepreneurs coming to the United States. Immigrant-owned businesses are one of my favorite things about New York—or any city really. That got me thinking, just how concentrated is New York with foreign-born business owners? What about other American cities? So, I dug into U.S. Census Bureau data to find out.
Almost half of Fortune 500 companies were founded by American immigrants or their children
The Center for American Entrepreneurship, a non-partisan policy and advocacy organization, published a study today on the founders of America’s most valuable companies—those in the Fortune 500. The results are striking—43 percent of companies in the 2017 Fortune 500 were founded or co-founded by an immigrant or the child of an immigrant, and among the Top 35, that share is 57 percent.
Ridesharing hits hyper-growth
The last year has been rough for ridesharing app Uber, what with a litany of regulatory challenges, lawsuits over intellectual property infringement, and questions about gender relations in the workplace. The new year even brought a Twitter-driven #DeleteUber campaign.
So, how’s the business of ridesharing doing? Well, we don’t have good government statistics for 2016 yet, but we do now have such data for 2015, and these show that the hyper-growth of ridesharing that we documented last year is, if anything, accelerating. In fact, just-released data from the U.S. Census Bureau on “nonemployer firms,” which tracks the activity of freelancers (as in the gig economy), shows that 2015 saw the strongest growth of ridesharing yet. Ridesharing through Uber, Lyft, and other apps showed no signs of plateauing in 2015, and instead, the evolving industry spread—including into new metropolitan areas.
How Big is the Tech Sector?
Earlier today, Tyler Cowen had a post titled "Why are there so few computer science majors?", which was prompted by this Dan Wang post on the subject. Among other things, Tyler wonders if there are relatively few computer science majors simply because the tech sector is actually pretty small. Since I was already working with economic data today for another project, I thought it was worth taking a quick look to find out just how big the tech sector really is.
First Round Capital: Collapse or Return to Normal?
Yesterday, an article in the Wall Street Journal talked about some adjustments in the venture capital funding market. The general thesis: fewer companies are getting funded, those that do are raising more capital than ever, and those that don't are left to die (zombie companies). I don't have the time right now to re-assess or validate that analysis in a meaningful way, but on the surface, it appears to be relatively sound.
However, it did make me curious about what's happening in funding markets, and since it's been awhile since I've done any analysis in the area, it prompted me to take a deeper look at funding trends. One thing stood out to me was a sharp reversion in first-fundings since 2015—particularly compared with relatively stable funding trends in later rounds.
The Third Wave of digital technology meets the Rustbelt
Much excitement has been building over what feels like the beginning of an era of immense technological advance, the central role that entrepreneurs will play in its development, and the potential for a wide range of regions to reap the rewards. But progress won’t come easy. Significant challenges are likely to follow as digital technologies expand into relatively untapped areas of the economy.
Two excellent books out in as many months—and a quick data analysis here—persuasively drive these points home.
What Startup Accelerators Really Do
Accelerators are playing an increasing role in startup communities throughout the United States and beyond. Early evidence demonstrates the significant potential of accelerators to improve startups’ outcomes, and for these benefits to spill over into the broader startup community. However, the measurable impact accelerators have on performance varies widely among programs — not all accelerators are created equally. Quality matters.
Accelerating Growth: Startup Accelerator Programs in the United States
Startup accelerators support early-stage, innovation-driven companies through education, mentorship, and financing, in a fixed-period, cohort-based setting. This process of intense, rapid, and immersive education aims to accelerate the lifecycle of high-potential companies and the experiential learning of their founders. Accelerators are playing an increasing role in startup communities throughout the United States, but are commonly misunderstood or mistakenly lumped-in with other early-stage supporting institutions. Early evidence demonstrates the significant potential of accelerators to improve startups’ outcomes, and for these benefits to spill over into the broader startup community and local economy. However, the measurable impact accelerators have on performance varies widely among programs. To that end, an accelerator pioneer offers some best practices.
A cure for health care inefficiency? The value and geography of venture capital in the digital health sector
Relative to other affluent countries, the United States devotes disproportionate resources to health care with disappointing results. Recognizing these problems, entrepreneurs are increasingly applying information technology to health care equipment, monitoring, treatment, and service delivery, creating a sector known as digital health. These technologies, once embedded and distributed around the country, hold the potential to substantially alter the efficiency and quality of health care through the better generation, processing, and use of information; the reduction of overhead costs; and the empowerment of patients. This analysis finds that digital health venture capital investment is a substantial and growing share of total venture capital, creating, even in its infancy, valuable returns for owners. Venture investments in digital health are more dispersed geographically than total venture capital, yet digital health entrepreneurship has no geographic relationship to the traditional health care sector. Rather, the presence of workers in advanced service industries strongly predicts digital health investment at the metropolitan scale.
The Gig Economy Is Real If You Know Where to Look
A number of reports in recent weeks have stressed that employment effects of the so-called gig economy—contract workers on software platforms such as Uber and AirBnB—have been overstated. At minimum, these reports indicate, any increase in gig economy employment hasn’t shown up in the aggregate statistics—at least not yet anyway.
But my analysis tells a different story, showing that the impacts can in fact be seen if you look more deeply at the data and in the right places.
The Farm Goes Digital
Digitization is transforming products, processes, and industries across the economy, and could be the key to sorely needed productivity growth across a wide range of sectors in the coming years, from manufacturing to mining, and from healthcare to home automation. One area of the economy that stands to benefit greatly from the coming wave of digital disruption is the oft-forgotten agricultural sector. Not only are the digital applications compelling, but agricultural innovation is an imperative—with no end in sight for global population growth, environmental degradation, and growing ecological constraints, increased productivity in the farming sector is a must. However, agricultural productivity growth has been steadily declining the last few decades, making a sustainable and inclusive global food source all but guaranteed. Technological innovation can—and indeed must—play a big role. Though in the early stages, emerging “AgTech” innovations have begun to show promise.
The Rich (Late-Stage Bay Area Startups) Are Getting Richer
Last month, venture capitalist Fred Wilson of Union Square Ventures posted a blog entry titled: The Rich Get Richer. In it, he notes that alarmists of a venture capital fuelled startup bubble are missing the point—it’s not an entire sector run amok, but rather, a small number companies that are driving headlines, consuming capital at a high clip, and reaching ever-higher valuations along the way:
As this brief analysis shows, Fred is right: a small number of later stage companies are skewing the overall numbers. However, there is one other point that Fred did not mention: this trend appears to be geographically concentrated in the Bay Area.
Establishments ≠ Firms
This article originally posted at the Updated Priors blog
I recently read a paper that took an innovative approach to at least partially answer a question that is boggling the minds of many economists and other observers: why has the firm formation rate declined precipitously the last three decades? I think it’s one of the most important topics in the economics profession today, and warrants a great deal of continued research in the coming years.
Aside from liking what was new about this paper, something else stood out to me—something I’ve seen before. The paper itself isn’t important here, so I’m not going to reference it explicitly—I’m not one to needlessly criticize someone else’s hard work, particularly when doing so isn’t central to the argument I’m trying to make.
The paper analyzes the relationship between, let’s say variable X, and the “startup rate,” defined as the rate of new establishment formations, not firm formations. This was done, presumably, because data on the former are much easier to obtain. But firms and establishments are not the same, and evidence suggests it has increasingly become important to distinguish between the two.
In research published last year by Mark Schweitzer, Scott Shane, and myself, we showed that the source of new business establishments is increasingly coming from existing firms, or what we call “new outlets”:
Figure 1: Distribution of New Establishments by Type (1978-2012)
Furthermore, because new outlets are generally larger than are new firms in terms of employment, economic activity at new business establishments (as measured by employment) occurs in no small part in new outlets:
Figure 2: Distribution of Employment at New Establishments (1978-2012)
This is something that is not occurring in isolation. The data show that this trend has happened in each broad industrial sector (9 SICs sectors) and across each state (data are not available at the metropolitan area level) during the last three and a half decades:
Figure 3: Share of New Establishments that are new Firms by Sector (1978-2012)
Figure 4: Ratio of New Firm Share of New Establishments in 2012 over 1978 by State
Among the sectors, the shift from new firms to new outlets as the source of new business establishments was greatest in finance, insurance, and real estate, the very broad transportation and utilities (which includes communications) sector, and in construction. Agriculture, retail trade, and mining saw the smallest changes over the 34-year period—but changed nonetheless.
For the states, the chart shows the 2012 new firm share of new establishments over that same share in 1978. Since the data are sorted by largest ratio at the top, states experiencing the smallest shifts from new firms to new outlets as the source of new business establishments are at the top, while those witnessing the most change are at the bottom.
In short, the importance of new outlets to the formation of new establishments has grown steadily and significantly during the last few decades, and this shift has occurred in each of the broad industry sectors and US states. As a result, studies that substitute new establishments for new firms—including when exploiting industrial and geographic differences—are increasingly using less precise estimates over time.
Early-stage venture capital: More regions get in on the action
Start-Up Capital Is Spreading Across the U.S.
Startups have seemingly never been more popular, particularly in the U.S. Investors like Steve Case and Brad Feld are betting on companies outside Silicon Valley, predicting that “the rise of the rest” will geographically level the entrepreneurial playing field and make startup communities more prevalent throughout the country.
But what do the numbers say? Are startup hubs really forming all over the U.S.? To begin to answer this question, I analyzed data on a small subset of early-stage entrepreneurial ventures that are focused on high-growth — those receiving venture capital funding. I aggregated venture capital deals for each U.S. metropolitan area — 381 in this case — annually between 2009 and 2014, looking only at “first fundings,” or initial rounds of professional venture investment (those most closely associated with starting-up).
This analysis demonstrates that while a handful of well-known cities continue to dominate the landscape of early-stage venture-backed entrepreneurship, a non-trivial amount of catch-up by other cities has occurred.