Startup Growth and Venture Returns | Hacker News Reader

Startup Growth and Venture Returns

angel.co

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"Consequently, we filter our dataset down to only those companies that raised a seed round with AngelList, and those companies’ subsequent rounds of fundraising that we have information on"

Doesn't that mean the conclusions of this are based upon only companies that did a follow-on round, not companies that raised money in general? Of course there are seasoning effects, but throwing out all the companies that can't raise to conclude "Our model shows that at the seed stage investors would increase their expected return by broadly indexing into every credible deal".

If that was the case, the conclusion should be "our model shows that seed investments that receive follow on investment should be indexed to", but that isn't know at the time of the previous round. The discussion seems to ignore the huge bias of censoring as well, but I might be missing something and I didn't get through every word.

Yes, I suspect there is some survivorship bias in this analysis.

For a less comprehensive, but also less complex and opaque, analysis, I looked at the cash on cash returns from seed, series a and series b investments in some of the top performing companies in recent years: Uber, lyft, twitter, Dropbox, Pinterest, snap and zoom [0]

I did this as a way to compare tech and biotech seed investing (I work in biotech). Outlier returns in biotech are lower than in tech, so managing risk across a portfolio is more important than just getting in on big winners (i.e. Consistent base hits and home runs, not just going for one or two grand slams)

Interestingly, biotech VC has outperformed tech VC over the last decade. This is despite lower returns on an individual- investment basis. This suggests that concentrated portfolios with low loss rates can perform better than portfolios than power law portfolios [1]

So if you are a biotech investor, you probably shouldn't follow the tech investing playbook

[0] https://www.baybridgebio.com/blog/anatomy_of_a_decacorn.html

[1] https://www.baybridgebio.com/blog/anatomy_of_a_top_vc.html

Great reads. My first hunch on the former is that the barrier to entry is higher in biotech than tech in general, but the barrier to exit is lower in biotech. I'm sure that's a gross overgeneralization, but would you be inclined to agree?

Thanks. I think the barrier to starting a biotech company is higher as you can't bootstrap as easily (though it is becoming easier to do so) and you can't get exponential growth on a tiny amount of capital (which you can do in tech with product market fit)

The exit environment has been good lately. The M&A market will be strong for the foreseeable future bc big pharma relies on startups for new drugs when existing drugs go off patent. The IPO market has been good, but that could change for a number of reasons, including rising interest rates

Forgive me if this is an obvious question, but why would rising interest rates cool off the IPO market? Cascading effects?

> Conventional investing wisdom tells us that VCs should pass on most deals they see. But our research indicates otherwise: At the seed stage, investors would increase their expected return by broadly indexing into every credible deal.

> That’s one of the results we found when we analyzed the thousands of deals syndicated by AngelList over the past seven years to test assumptions about the nature of venture capital returns. ...

That period includes the loosest Fed monetary policy on record. It's remarkable for both Quantitative Easing and in some industrialized regions negative nominal interest rates, two things that few economists were talking about before 2008.

At some point it will be clear to everyone that the last 12 years have been a mirage conjured by utterly unsustainable economic policies.

As the saying goes, if the wind is strong enough even turkeys can fly.

Or we are going through a massive shift where tech is being deployed across the entire economy.

And we're just beginning. Walking through the city, I still see tons of people (working staff like construction, delivery, etc) not using modern technology even though it's decades old, proven and cheap, to increase their efficiency.

example? What modern tech is a delivery person to use to make their job more efficient? i can't believe they aren't already using a GPS to locate the destination. They are using barcode/scanners presumably (or electronic signatures).

They are not using both of these. It's a state owned company...

The report is at https://angel.co/pdf/growth.pdf.

Thanks - saved a click! Appreciate it

What exactly happens when there is a bubble in the private markets? And what happens when it crashes? Does it affect the public markets in anyway?

In other words, if I believe there's a huge bubble in the private valuations of unicorns likewise proven by companies like Wag or WeWork, will it A: Affect my 401K and mutual funds I have in Vanguard and B: Is there anything I can do to short it?

Probably the best way to take advantage of a private market bubble is to sell into it. In other words, pitch a trendy idea to an angel and raise money. Or if not that, sell something that is consumed a lot by bubble participants. In other words, in a gold rush sell mineral claims or shovels. It's much more feasible to do that then to short private investments.

Take the barbell strategy — make sure to exit any less liquid investments (e.g. stock), and then extract capital from the bubble by raising money. When the market crashes, use your cash to purchase cheap assets and/or failing companies, and then work towards profitability.

Absolutely do not: become a VC, work for a startup, or place your capital into some kind of ‘growth’ fund indexed to tech. Don’t buy real estate in urban areas and don’t borrow.

Raising money in the bubble doesn’t do anything if you can’t liquidate from the company with good terms and you’re paid a startup founders salary right?

WeWork begs to differ - get the highly funded startup to purchase your own property/contracts to extract the value out of the startup and into your own pockets. Then when the economy/startup tanks, leave and let somebody else pick up the pieces.

In a bubble, your terms and leverage as a founder are better, including self-comp, voting shares, and funding runway. Raising money is always risky (hence the barbell), but you have unlimited optionality compared to a desk jockey.

Become a founder of Uber for dog grooming and raise a billion before the investors realize they paid for both the dogs and the tools. /s

Interestingly, the report indicates that only ~50% of their dataset has negative returns, and the mean IRR of the success cohort is 35%.

This is both much higher rate of success and somewhat lower return than I would have expected. I guess the takeaway is that many companies (that reach seed round anyway) have middling success?

Study author here.

You can think of the AngelList investment data as being split into three roughly equal-sized groups: markdowns, markups, and no valuation updates.

The reported IRRs are actually relatively high and the return multiples (which are compounded IRRs) are relatively low. That's because there are lots of one- and two-year-old companies in the dataset and---as we show---IRRs and investment durations are negatively correlated.

AngelList study concludes you should invest on AngelList.

One thing that I still find quite surprising/troubling about the current tech landscape, is the incredibly strong "rich get richer" feedback loop of seed and VC investing. Especially given that most people in Silicon Valley seem to really value the idea of meritocracy when it comes to founders and companies and job opportunities. Although the personal connections involved would be a big barrier to outsiders regardless, I find it crazy that there's also the explicit legal requirement that you must be worth at least a million dollars in liquid assets to be an accredited investor and invest in a private company.

The argument in favor of the current system is that investments are risky and non-millionaires can't be trusted to make good financial decisions for themselves, and it takes such a huge amount of skill to be a decent investor anyway that the average person isn't really missing out on anything.

This type of finding seems like a pretty strong refute of this idea. It turns out that at least in the current landscape, the average tech seed investment deal is more valuable than other investments available to people.

Are you sure you're not comparing liquid vs illiquid assets? I.e. public shares that you can sell at a stock exchange vs. a highly speculative valuation that may pop >10x like WeWork did.

There's also this wonderful disclaimer:

>Summary statistics from the AngelList dataset of 684 nonnegative investments that we consider in this paper.

Given that 90% of startups fail, they are are looking at the top 10% investments. I am pretty certain if you hand-pick the 10% top-performing public stocks, you will also get great numbers. The problem is, this only works in retrospective.

So their conclusion is based on just looking at non negative investments? If so how useful is this data? Because there is no way to practically know what investment will be a positive or negative investment. In other words, there is no way to broadly index among all non-negative investments.

The paper should have compared brodly indexing among all startups vs hand picking possible winners. This is practical and avoid any survivorship bias.

Of course there is a way to broadly index among all non-negative seed investments: by broadly indexing among all seed investments.

The fraction of money-losing investments in a population will affect, for instance, whether we would expect the typical investor making five investments at random to make or lose money. But regardless of whether losers are 10%, 50%, or 90% of the investment pool, if the winners are drawing from an unbounded mean power law then broadly indexing raises an investor's expected return.

Your last paragraph is a misinterpretation of this paper. You are interpreting the result as saying "Investors would benefit from broadly indexing at seed". The paper instead says "Seed investors would benefit from broadly indexing".

In other words, spray and pray?

Or, the benefits of diversification still hold up

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