Venture Capital Evolved
Crunchbase reported that over 100 2021 unicorns reached the status by the B round. TechCrunch reported that Angel List has a fund that allocates capital using algorithms. Kyle Harrison says Venture Capital is becoming productized. Institutional Investor says that there is plenty of data on private companies. Is this is the golden age of data-driven decisions?
- The Golden Age of Data
- Valuations Crash
- War in the Valley
- Public Markets
- Web3 Focus
- Strong China
- Africa Unleashed
- Startup of the Week
- Tweet of the Week
When I read the headline of the press release that heads up this week’s newsletter I had to click. I am a data geek. I love being able to understand an ecosystem through its data. That said, I am not data-led. I start with my experience and intuitions based on it. I form opinions. Then I look to data to support or deny my impression.
“Affinity Finds 20 VC Firms Fund Nearly Half of All Unicorns” was, therefore, a must-click for me. Sadly it was a press release. But it does point to a downloadable report. But that is a marketing document for a CRM offering called Affinity. I kept it in the curated list below as an example of how poor data on venture capital really is, and actionable data is even more sparse. For the record 10 investors are in more than half the unicorns as shown by this query from our friends at Crunchbase.
It reminded me of when Mike Arrington started collecting an Excel spreadsheet about all of the companies he covered on TechCrunch because there was no source of truth about them. Who had invested in them, and so on. Today that spreadsheet is Crunchbase. Along with Pitchbook, CB Insights, and DealRoom, it is one of the few good sources of intelligence about the venture ecosystem. Crunchbase’s Chris Metinko published an article this week showing that unicorns minded prior to the ‘C’round are on the rise.
So data intelligence (not just data) about venture capital is beginning to surface. SignalFire is a data-driven investor in startups and now manages significant funds. Angel List is a source of data about startups too and is using it to help managers make capital allocation decisions.
Natasha Mascarenhas at TechCrunch wrote an article this week about algorithmic investment and whether it is compatible with due diligence. She noted that
AngelList’s recently closed early-stage venture fund is basing all of its investments off of one key metric that AngelList has been tracking for years: a startup’s ability to hire.
She goes on the quote Clearco co-founder Michele Romanow
“We don’t believe any one signal is enough to holistically look at the success or future growth of a business. We try to look at as much data as possible, and while hiring can be one aspect, on its own, [it’s] just too subjective and open to manipulation,” Romanow said. The co-founder built a fintech unicorn that offers businesses a certain amount of non-dilutive capital based on a select few metrics. The company, formerly Clearbanc, started with growth capital for marketing expenses and recently expanded to inventory and payroll.
“Every little while, we hear more rumblings that the industry will shift to lean in this direction, but candidly, it’s hard,” she said. “It requires deep technical expertise and a product to match, so while it sounds nice on the surface, people generally revert to what they know, which is the traditional gated system with humans making decisions based on intangible factors.”
Michele’s reticence to credit data-driven approaches to capital allocation stands in contrast to the hedge fund world where quantitative analysis and indexing are key parts of strategy. Venture Capital is still a largely artisanal ecosystem. But the artisans are less and less able to present themselves as special. Kyle Harrison’s piece (below) about the productization of venture capital spells out the trend. He tells us:
we’re seeing a continued growth in the size of potential outcomes. In 2006 there was a total of 387 companies in the US generating over $1B in revenue. Across every industry, from utilities to CPG and beyond.
Now there are over 4K companies with $1B+ in revenue. Within technology we crossed the 100 company mark in 2011. 100 companies with over $1B in revenue. In 2020 there were nearly 200 companies, having added 51 companies just in the last few years. Companies like RingCentral, DocuSign, Zendesk, Twilio, and Dropbox crossed the $1B revenue mark.
The secret is out. Technology is taking over the world and we’re in the early innings. As that number of companies grows there will be more large outcomes. That will continue to attract more capital. More capital, more venture firms. And so on.
Here’s my hot take: venture capital can’t just stay a services business. Competition is already going to limit returns, both through less available allocation in the best companies and higher entry prices. Venture capital is going to have to evolve.
Venture Capital evolving is hard to believe. It really seems to stay the same. But it is evolving and it will continue to change.
By way of example, at SignalRank we have over 40,000 investment rounds into unicorns. We analyze that data to create leaderboards of Angels, Seed Funds, Venture Funds, Family Offices, and the like. We also have access to every round ever in any company. We can tell you mean time between rounds, trends in valuation and amount raised, qualitative scoring based on who invests, in sort we know what a good one looks like.
That means we have strong signals, by the A round, as to which companies are less likely to fail, and which are likely to accelerate. And we can do that globally and across or within industry sectors. This kind of data intelligence will itself become a commodity at some point, but for now, it is rare.
As Machine Learning, Models and AI become pervasive across most data-rich industries, venture capital will not be left behind. More in this week’s video.
The Golden Age of Data
SAN FRANCISCO, Jan. 25, 2022 (GLOBE NEWSWIRE) — Affinity, the relationship intelligence platform for dealmakers, today launched The Relationship Intelligence Benchmark Report: Unicorn Edition, which found that VCs managed nearly twice as many deals in 2021 as they did in 2019. Moreover, just 20 firms funded nearly half of all companies that reached unicorn status over the last five years.
Analyzing data across the Affinity platform, the Relationship Intelligence Benchmark Report provides an inside look at more than 925 unicorns from 2017–2021, as well as the relationship intelligence and deal flow of the venture capital firms that invest in them.
“When the pandemic struck, few could have imagined that relationships of all kinds — including those that drive the world of venture capital — could be relocated successfully online. Yet there was more funding activity in 2021 than in the last 5 years combined,” said Ray Zhou, co-founder and CEO of Affinity. “At Affinity, our technology and our development philosophy is driven by the idea that relationship intelligence — insights derived from the automated capture and processing of billions of data points — can drive the VC industry forward and make all of us more successful in this new landscape.”
In 2021, venture capital funding reached an all-time high, nearly doubling the previous year. However, with just 2.5% of startups reaching unicorn status, the key to finding and funding a unicorn comes down to having the relationship intelligence to close deals faster. The report also found that the top VC firms averaged a collective network of 88,774 connections per firm (or 2,293 per person), and those firms make an average of over 2,500 introductions annually. Even more stunning, top VCs send more than 90,000 emails and have over 18,000 meetings each year — all while tracking 6,000 deals each month.
Relationship intelligence is a major factor in discovering a unicorn, but so is having a platform that is easy to use at a high speed. Affinity’s data and systems supports customers’ CRM needs and collects relationship intelligence, saving precious time with automation while providing a digestible landscape of data. Across the Affinity platform, over 500,000 new introductions are made and 450,000 deals tracked per month. By capturing relationship exhaust — over 18 trillion emails and 213 million calendar invites to date — Affinity automates contact records and tracks activity saving over 180 hours every year in data entry work. As a result, customers are able to focus on making the connections to find their next unicorn faster. GlobeNewswire
When Everyone is Special Nobody is
Sometimes when a founder goes looking for a venture fund to work with it can feel like candle shopping. Some candle aficionados will tell you they’re all unique in their special way. But the average person knows the options are mostly just wax, food coloring, and different flavors of axe body spray.
When you think about the size of the prize in venture think about it this way. There is over $100 trillion of global public equity value. Private VC-backed companies represent a tiny fraction of that. There is a LOT of room to go.
Even though we’ve already got a highly commoditized capital base chasing startups we’re just getting started. More LP capital means more venture funds. So every VC can either stick their heads in the sand and pretend they’re special or they can step back and evaluate what has changed about the startup landscape and innovate accordingly.
In algorithmic investing, investors use a company’s metrics to decide whether to participate in a deal. But when the art of choice is factored out, it becomes more difficult to perform deep due diligence on founders who may be about to receive millions of dollars via a wire transfer.
In practice, attempts to remove bias can create newer, blind spots that are harder to identify.
In theory, algorithmic investing hedges against investors’ preconceived notions and pushes emotions to the side. Fintech unicorn Clearco and venture firm SignalFire have spent years implementing data-focused investment processes, joined more recently by AngelList and Hum Capital. While this approach isn’t new, the movement against solely emotion-based decisions feels louder given the proliferation of dollars out there.
Metrics, even in the earliest stages, are becoming more mainstream.
AngelList’s recently closed early-stage venture fund is basing all of its investments off of one key metric that AngelList has been tracking for years: a startup’s ability to hire. TechCrunch
In fact, Makkawi started EQUIAM on the premise that there’s plenty of available data that can be used to identify good investments using algorithms, a development that would allow the company to compete with traditional venture-capital firms. But while the hidden risks the SEC wants to address are real, it’s a myth that there’s a dearth of data available on companies that live in the private markets, particularly later-stage startups and unicorns valued at more than $1 billion.
Unicorns Are Being Minted In Earlier Rounds
Not only were new unicorns minted at a breakneck pace in 2021, but they were created in early-stage funding rounds at an unprecedented rate.
While nearly 600 new unicorns were minted last year, about 18 percent were companies reaching that status after an early-stage funding round — defined as seed, Series A or Series B, according to Crunchbase data. Last year saw more than 100 unicorns created through early funding rounds, nearly 5x the number in 2020.
Nearly a quarter of Yale’s endowment is invested in venture capital.
Yale’s endowment reaped the benefits of a record-breaking year for venture capital, with U.S. investments in the industry reaching $330 billion for the first time ever in 2021.
University endowments with significant venture holdings saw the highest returns in decades as venture capital markets thrived, with endowments at schools such as Washington University in St. Louis and Duke University climbing more than 50 percent, according to the Wall Street Journal. Yale’s endowment, which saw a 40.2 percent rate of return last year — its highest rate since 2000 — made its first venture capital investment in 1976 and has since increased the target allocation to the asset class to 23.5 percent.
“Yale’s venture capital portfolio has grown over time through a combination of strong performance and increased new investment,” Danny Otto, associate director of the Yale Investments Office, wrote in an email to the News. “We view the opportunity to harness novel technologies to build new businesses across all sectors of the economy as a generational one and have been investing accordingly.”
As of 2020 — the most recent year with complete data available — 22.6 percent of Yale’s endowment was invested in venture capital, compared to 7.7 percent for the average educational institution. In June 2020, the target allocation for venture capital was increased to 23.5 percent. Other asset classes include absolute return, public equities, leveraged buyouts and real assets. According to the 2020 endowment report, the venture capital portfolio earned an annualized return of 21.3 percent for the ten years ending June 30, 2020, while the overall endowment had annual returns of 10.9 percent over the same period.
For more than a year, startup founders have watched in awe and some trepidation as hedge funds and other large investors flooded private startups with big checks, pushing up valuations and making it easier than ever to raise money.
Those freewheeling days may be numbered as a sell-off in public tech stocks bleeds into the startup world. Among the examples of change: Investors are starting to play hardball. Tiger Global Management, one of the biggest funders of private tech startups in the past two years, and some of its peers have been slashing their offers for shares of private software startups, sometimes after founders signed the investment paperwork, people with knowledge of three such deals told The Information.
War in the Valley
Twitter was abuzz Tuesday over a long thread written on Monday by Bolt CEO Ryan Breslow, who claimed that Stripe and Y Combinator are “mob bosses,” using “every power move imaginable” to block competitors from becoming successful.
In other words: Silicon Valley is cutthroat. Who knew?
Or at least, that summarizes most of the replies on Twitter. Few deny that there’s a powerful hierarchy in Silicon Valley. Most agreed with Breslow’s assertions about Y Combinator’s influential stature and Stripe’s impressive cap table. But given that Bolt was initially rejected from Y Combinator, and competes directly with Stripe in payments, most onlookers are taking the tweetstorm as a pretty low blow.
“I hold no interest in Stripe, Initialized is not an investor … but this take by a Stripe competitor is just dishonest,” tweeted Initialized Capital co-founder Garry Tan, a former Y Combinator partner. Joe Benjamin, the founder of Profs, called it a “marketing stunt.”
I hold no interest in Stripe, Initialized is not an investor, I was not around for that company going through YC (I had credit card debt and was struggling through as an engineer myself at the time)But this take by a Stripe competitor is just dishonest. — garrytan.eth 陈嘉兴 ??????(∞, ∞) (@garrytan) January 25, 2022
I’m pretty sure the Bolt thread about YC, Stripe and HN is a marketing stunt. 1. Create narrative of an enemy/us vs them2. The relatable underdog 3. Perfect bait for the tech community to jump in and dunk or provide their thoughts Marketing 101 on social media — Joe Benjamin (@JoeBenjamin_) January 25, 2022
The tweets gave Breslow’s account of Bolt’s rise to its current $11 billion valuation (it raised $355 million this month). The storyline was familiar to most starry-eyed entrepreneurs: a great product that VCs and peers didn’t initially see value in, but that rises to be a top competitor in the field. But in Breslow’s telling, VCs and customers ignored Bolt in the early days because it wasn’t part of Y Combinator, and Y Combinator formally and informally backed Stripe.
Indonesia’s GoTo and Nigeria’s Flutterwave are among the giants expected to go public.
Initial public offerings aren’t just startup success stories. The six IPOs we have our eye on this year tell us what’s so unique about the tech scene they grew out of: like payments unicorn Flutterwave from Nigeria, where fintech startups are taking over traditional and legacy industries, and Chinese social video and photo sharing platform Xiaohongshu, the latest in a long line of Chinese companies to seamlessly combine existing services, integrating e-commerce with an Instagram-like social video and photo app.
One thing we’re watching for in 2022? More IPOs outside of the U.S. After Chinese ride-hailing giant Didi delisted from the NYSE in December, the next crop of successful Chinese companies are expected to list in Hong Kong or Shanghai rather than New York. And last year, exchanges from Mumbai to Jakarta revamped their rules in the hopes of attracting more high-profile floats.
From a fintech giant in Africa to a resurgent wellness platform in Latin America, these are some of the most interesting companies outside the West likely to go for an IPO in 2022.
SPAC — Here Today, Gone Today
One of the pandemic’s hottest trades is cooling down, as the hype surrounding “blank-check” companies gives way to reality. The threat of tighter regulation is looming, and high-profile stumbles have taught investors some tough lessons.
Crypto, Web3 and The Global Unleashing
The rise of the bottom up, and surprising lessons and leadership from Africa and other rising markets
“Top down institutions in the end,” she told me, “view people as problems to be solved. We here in our big capital and bureaucracies will solve you poor people’s problems. But a bottom up mind set looks at people as assets to be unleashed. Here problems are solved by people with the talent and greatest interest in solving what they understand best and often in their own backyards.”
We are in an era of a great unleashing.
So many conversations I have about crypto and Web3 focuses on the technology, and the FOMO of who is making something or some money faster than someone else. All periods of revolution have some version of this. The wonderful quote, wrongly attributed to Arthur C Clarke, rightly sums up the history of innovation perfectly: “Revolutions are most often over estimated in the short run, and underestimated in the long.”
But revolutionary periods while often driven by new generations and enabled by newest technology, actually boil down to basic human behavioral needs.
So here are two basic questions in the context of crypto:
1) If top down institutions which have been created to better society, the economy, education, crime, health, freedom of expression and more not only don’t deliver the goods, but seem less and less relevant and even a rigged game — at what point do people, at scale, say “we need something else?”
2) More tactically if I can move value and “money” more safely, more securely, without friction and at a fraction of the cost of even the most recent disrupters, why wouldn’t I?
I think the answer to both questions explains much if not all about what is happening today.
Greylock general partner Reid Hoffman and his Blitzscaling co-author Chris Yeh examine the current development of Web3, focusing on how basic human nature is driving some of the innovation. This discussion was sparked in part by an article by Bloomberg reporter Joshua Brustein, who interviewed Hoffman about his recent essay on his experience as a Web 2.0 entrepreneur and investor. In that essay, Hoffman described the ways the “wild idealism” of the era led to major advances that both positively and negatively impacted the world, and how the “seven deadly sins” of humanity form the basis of many technological pursuits. You can read a transcript of this conversation here: https://greylock.com/greymatter/vices-and-virtues-in-web3/
“When your outflow exceeds your income, your upkeep becomes your downfall.” — Jim Rohn
In late 2016, we were approached by a brilliant entrepreneur with an interesting investment opportunity. We mask the full details here to protect anonymity but believe us when we say this person has a knack for being incredibly early to imminent megatrends at the bleeding edge of technical and social disruptions. His pitch involved a company he and some colleagues were starting that had something to do with “bitcoin,” which he described to us as a form of “crypto currency.” We knew precious little about bitcoin or crypto currencies back then, nor did we understand what the newly formed company intended to do, but in a classic “bet the jockey, not the horse” move, we agreed to participate in the seed round at the minimum investment level. We immediately marked this equity investment to zero on our personal balance sheets.
In the following months, we engaged in a series of philosophical conversations about crypto currencies with our friend to learn more. Concurrent with this quest for knowledge, the paper value of our modest investment began to soar, which had the understandable effect of increasing the urgency of our research. We distinctly recall drawing two circles on a piece of paper. In the circle on the left, we wrote “real economy,” while in the circle on the right we wrote “crypto universe.” We drew two pipes between the circles — one flowing into the crypto universe and the other flowing back to the real economy — and labeled both pipes with “fiat currencies.” While we understood how fiat currencies from investors could flow in, we failed to grasp what could be occurring within the crypto universe that would create more fiat currency for investors to take out at a later date. There seemed to be many brilliant people excited to be working in the space and using a technical language foreign to us, so we concluded that our inability to understand this rather pertinent issue was a fault of our own making.
Then bitcoin went bananas in late 2017.
They say we are shaped by our experiences, and as bitcoin went parabolic it certainly impacted us. Watching our modest foray into a little understood technology skyrocket in paper value several hundredfold left a jagged mark as it crashed with the rest of the crypto market back to where we had always kept it marked — zero. Along the way, we did make a few half-hearted efforts to get the outflow pipe turned on — life-changing fortunes are worth bending over and picking up, after all — but since we could not get an answer to our foundational question, we never held out much hope of converting paper into reality. There would be no lambos for the green chicken team.
Bukele’s hubris likely derives from the revelation that […El Salvador] intends to issue bonds backed by bitcoin, and to circumvent the traditional banks to do so:
“El Salvador’s national adoption of bitcoin was easily the most transformational cryptocurrency landmark in a year full of them. The use of bitcoin as legal tender seems poised to attract a wave of experiments and investment, while a program to mine bitcoin using volcanic energy could be a significant boost for the lower-income economy.
But El Salvador’s recently-announced “Bitcoin Bond” may be the most truly disruptive and empowering part of the project. By selling bitcoin-backed bonds through blockchain infrastructure, El Salvador will bypass the Wall Street banks and international institutions that have had a century-long choke hold on loans to developing economies. There are signs that this could escalate into a full-scale public battle as global financiers angle to retain control of the system.”
“I don’t believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can’t take them violently out of the hands of government, all we can do is by some sly roundabout way introduce something they can’t stop.”
The political economy of fiat is one of toxic bigness.
Given fiat money exists only as the liabilities of state-licensed banks with politically preferential access to artificial credit, bigness in banking is rewarded by default, and bigness in business is rewarded by proximity to bigness in banking. The losses of both are socialized under the pretence of preventing financial catastrophe, but of course the real catastrophe is the thumb on the scale against the small and the politically unconnected. Capital markets abjectly fail in their titular goal of creating a market for capital. They become, instead, political tools, whose politics are anything but “local”.
This is clear enough from the fallout of Operation Choke Point (aptly named given the core premise of political capture) but the reasoning bleeds also into analyzing the architecture of the internet. Given the lack of native digital value prior to Bitcoin, online monetization has primarily been architected around the assumption of advertising, which of course means surveillance as well. Every action one takes in consuming online content is relentlessly spied upon as potentially valuable, while capturing and processing this value has enormous returns to scale given single such data points tell you nothing, but trillions can be mined for patterns that no human could identify. You cannot run an online business without appeasing those who have mastered this game and who, surprise, surprise, have also been politically captured. Their bigness makes them targets for political capture, and their political capture keeps them big and makes them bigger.
It is becoming more widely understood how bitcoin fixes this, and, in general, encourages economic thinking along more local lines and heuristically warns against the excessively interdependent and fragile. Energy markets are perhaps the most obvious example: “toxically big” is perhaps an odd criticism of the grid, given it is more of an economic miracle creating a clearing price for power — which, unlike inflation, is a necessarily transient economic phenomenon. And yet, Bitcoin allows detachment from this vast, costly, and systemically fragile infrastructure by allowing for the creation of a clearing price bought and sold only over the internet.
What are they, where are they and who’s going to IPO next?
It’s time to go chasing unicorns.
Unicorns are that elusive species in the startup world — worth over $1 billion, privately held, and a symbol of how much magic is happening out there in the business world.
So let’s take a look at a snapshot of the state of Chinese unicorns and potential companies for future listings. By the end of 20211, China has 295 unicorns2. That compares to 497 mythical creatures in the US.
Unicorns by sector
In terms of sector spread, most unicorns are in enterprise services, healthcare and automotive.
Tech pioneers from Cellulant, Paystack, and Andela are backing the next generation of founders in Lagos and Nairobi.
Back in 2016, Honey Ogundeyi, then founder of e-commerce startup Fashpa, received an email from a fellow founder, Shola Akinlade. Akinlade had just launched his fintech company, Paystack, along with co-founder Ezra Olubi, and was on the hunt for his first clients. It was the start of a collegial relationship, more like partners than client and customer, as both companies navigated the complexities of Nigeria’s startup ecosystem.
Fast-forward five years and Ogundeyi, a serial entrepreneur whose resume includes stints at Google, Ericsson, and neobank Kuda, is back as a founder, this time of Edukoya, an Africa-focused edtech startup. Akinlade reached out to her again, only with a new offer as an investor. He joined Edukoya’s $3.5 million pre-seed round, which closed in December.
Experiences like Ogundeyi’s are becoming more frequent in tech ecosystems across Africa, which has seen a major boom in venture investment over the last two years. In 2021, African startups received more than $4.3 billion in venture capital funding, according to research house Africa: The Big Deal. That number was 2.5 times the funding raised in 2020, itself a record year.
Much of the narrative and media coverage around the booming market have focused on the biggest names, with billion-dollar valuations for unicorns, like Nigeria’s Flutterwave and Egypt’s Swvl, or major exits, like Stripe’s $200 million acquisition of Akinlade’s Paystack. But insiders said the real energy is found in early stage ventures, where more local angel investors than ever are taking chances on a new generation of entrepreneurs. Increasingly, those investors are themselves former founders and startup executives. It’s a marked change from 2013, when Ogundeyi launched Fashpa. “There was very limited access to capital with a few choices of local angel investors,” said Ogundeyi. Anecdotally, investment figures were often around the $5,000 mark, according to the tech veterans Rest of World spoke with. Last year, a survey of angel investors in Africa by African Business Angels Network (ABAN) / Briter Bridges found that “most angel investors invest up to $50,000.”
Startup of the Week
The company is scrapping another plan that would have blocked so-called cookies after privacy groups and regulators complained that Google needed to do more to ensure privacy.
Tweet of the Week
Sam Altman, the former president of start-up accelerator Y-Combinator and the co-founder of OpenAI, has ridiculed the start-up fundraising process.
“This is not Silicon Valley” is published by Keith Teare.
I wrote this essay in December 2013 whilst spending 6 days on the Island of Hainan between events in Guangzhou and Shenzhen.
It retains its relevance today in the context of the so-called Series A crunch and the Unicorn boom.
The original essay
Since early 2011 I have been working with early stage companies through my role at archimedes labs. We have 14 portfolio companies and have been fortunate to work with some wonderful founders. M.dot has been acquired by GoDaddy; Quixey has raised significant rounds of finance, including $50m from Alibaba most recently; Kwicr is revolutionizing bandwidth use and has recently announced significant funding; and more than 90% of the remainder have been funded since we got involved with them. just.me had the privilege of working with Khosla Ventures and True Ventures, Google Ventures, BetaWorks, Crunchfund and others.