

Startup Investment Hits 3.5 Year Low in December, Q1 M&A Slowest Since 1995 - dmor
http://www.daniellemorrill.com/2013/04/startup-investment-hits-3-5-year-low-in-december-q1-ma-slowest-since-1995/

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biznickman
This news was reported in January:
[http://thenextweb.com/insider/2013/01/16/vc-funding-
increasi...](http://thenextweb.com/insider/2013/01/16/vc-funding-increasing-
for-mobile-and-healthcare-startups/). Also, using Crunchbase as a source for
total funding is not incredibly accurate. CBInsights has far better data on
this since they are tracking literally all venture funding activity. What
would be more valuable is to see how this differs from one market segment to
the next over time.

Update: I just saw this was for Q1. Totally got that mixed up. Still though,
not sure crunchbase data is most accurate.

~~~
dmor
Ah my bad, should have been clear it was the Q1 part about IPOs and M&A that I
didn't see reported in tech pubs. Will clarify.

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philfreo
> Other possible explanation: people aren’t using Crunchbase as religiously as
> they used to. We didn’t put our round on Crunchbase. Everyone we care about
> uses AngelList.

I find this much more likely. A couple years ago Crunchbase seemed to be way
more up-to-date than it is now. Reasons probably include: AngelList gaining
traction, TechCrunch no longer seems to be as actively updating Crunchbase and
isn't including a big "Crunchbase box" at the bottom of each article like they
used to.

~~~
dmor
Even if AngelList data were added I don't think it would account for more than
25,000,000 in a month (about 1% of the investment logged in December) which is
a comparably small amount. The bulk of the money comes from Series A, B, C and
later stage deals from VCs and I think TechCrunch keeps those updated
themselves.

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mindcrime
_Even more concerning, on Monday the National Venture Capital Association
reported..._

But is it concerning? These numbers, in isolation, aren't necessarily an
indicator of a Bad Thing. Maybe the cost of founding a startup has dropped to
the point that fewer startups are choosing the venture capital route? Maybe
more people are bootstrapping, crowd-funding, and funding organic growth from
customer revenue?

~~~
joshavant
I like the optimism, however, you'd expect the same factors would be at play
as you move backwards into the past (while funding amounts continued to rise).

I don't think any major event happened around Jul-Sept 2012 (about where it
started to trail off) that precipitated significantly cheaper cost of founding
a startup.

~~~
adanto6840
I don't have a very strong opinion or thought one way or another here really,
but perhaps it just became more mainstream "knowledge" (right or wrong), or
more common / trendy even, to not look for VC money quite as aggressively...

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trotsky
Crunchbase data backfills, you'll usually see the most recent 1-2 quarters
lower than what they'll be a year from now.

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nashequilibrium
Economics 101: "An increase in supply leads to a decrease in price" The
influx(crazy influx) of startups has allowed VCs to invest less an get higher
% ownership. You will not see a $40mill color type investment for a long time,
at least until we have a shakeout, which we will. Bloomberg West has just
added an additional hr to cover the tech industry 10am/3pm. This smells a lot
like the hedgefund biz. The startups remaining will be those that test
monetization from day one.

Note: I got a downvote, if u going to downvote at least explain why. If can't
then don't participate at all because it does not help the community.

~~~
argonaut
I didn't downvote you, but that is _not_ Economics 101. To give you an
example, supply is irrelevant to price in a perfect monopoly. Not all startups
are created equal. A lot of the new startups that are rushing in are just
noise. "Startups" are not a fungible product for which there are perfect
substitutes. A VC does not typically decline a deal because "I could just put
the money into another startup that has an identical team and identical idea."
If they like the startup they'll invest. If they don't they won't.

Demand is not spread out evenly among startups. A 95th percentile startup will
get multiple competing VC/angel offers, which bids up the valuation. A 30th
percentile startup is going to get no offers.

Furthermore, you could also say that demand is rising as well: exits from
previous years means that there are a lot of angel investors out there flush
with cash who are looking for the best deals.

From my experience (as an early employee at a VC-backed startup in SV), the
top startups (95th percentile), are still seeing high seed valuations.

As a side-note. If someone downvotes you, they _do not_ have an obligation to
explain themselves. If I recall correctly, pg stated somewhere a long time ago
that he was fine with people downvoting just to express disagreement.

EDIT: I found the link: <https://news.ycombinator.com/item?id=117171>

~~~
nashequilibrium
_"I didn't downvote you, but that is not Economics 101. To give you an
example, supply is irrelevant to price in a perfect monopoly."

Yes it is. A perfect monopoly is very rare and i don't see any, you using an
extreme case. Most importantly, the difference between company and industry
disappears under conditions of a monopoly.

_" A lot of the new startups that are rushing in are just noise."

That is your point of view and not a fact. This sets up my next point.

 _""Startups" are not a fungible product for which there are perfect
substitutes.

True. Although there are many startups circling the same new hot space, after
instagram, how many many new photo startups sprung up funded or not funded?
SoloMo, how many startups circled this space when it was hot? I heard a VC say
he is tired of hearing pitches about discovering friends nearby. Startups can
be put into clusters, if you ran a k-means or hierarchical clustering
algorithm on the startup scene you would see this. In these clusters is where
VC's or angel investors are spoiled for choice, they may not have perfect
substitutes but they are pretty darn close.

_"exits from previous years means that there are a lot of angel investors out
there flush with cash who are looking for the best deals."

This is just not true. Angel Investing is damn hard, have you ever looked at
the return distribution of the VC industry, it is more fat-tailed than
anything else. How many angel investors on AngelList have had profitable exits
in the last 3yrs? I see a lot of people outside of tech with money coming in
to be angel investors because its the new hot thing and they just need to put
in $20 000 per company. I have seen places popup where they give you just
accomodation and office space for a huge share of your business.

 _"From my experience (as an early employee at a VC-backed startup in SV), the
top startups (95th percentile), are still seeing high seed valuations."

You are talking about extremes here again.

_" If I recall correctly, pg stated somewhere a long time ago that he was fine
with people downvoting just to express disagreement."

Yes, but wouldn't it make a better community if out of courtesy you did. I
have seen people do it and i am impressed.

~~~
argonaut
_> That is your point of view and not a fact. This sets up my next point._

Okay. I was only saying that even though there are tons of startups, most
startups are not very valuable. Given that everything follows a power law, I
don't think this is just an opinion, but rather a widely held sentiment in the
VC community, the Y Combinator community, and the wider SV community.

 _In these clusters is where VC's or angel investors are spoiled for choice,
they may not have perfect substitutes but they are pretty darn close._

VCs and angels understand that it's not the idea, it's the team. There is most
certainly clustering of ideas (i.e. crowdfunding, X-sharing, etc.) Yet VCs are
by no means spoiled when it comes to choice of teams. There is a _huge_ amount
of variability when it comes to the quality of founding teams. The best
founding teams will still get extremely high valuations, and mediocre teams
will get no funding at all.

 _> This is just not true. Angel Investing is damn hard_

I am well aware that angel investing returns suck. I'm not talking about those
people. I'm talking about founders/employees who are now multimillionaires due
to acquisitions/IPOs. You forget that every time a company has an exit of
30M-1B, you now have 3-10 multimillionaires. There are probably 50+ early
Facebook employees who are now dabbling in angel investing after the IPO
(lackluster IPO notwithstanding).

 _> You are talking about extremes here again._

This sentence does nothing to actually disprove my point. The whole economics
of startup investing revolves around the extremes. So of course we need to
talk about the startups at the 90th and 95th percentile. Your "average-case"
startup never gets funding and fails, no matter what the economic condition
is.

 _> Yes, but wouldn't it make a better community if out of courtesy you did. I
have seen people do it and i am impressed._

It would be helpful, but the tone of your original post made it sound like a
demand: "If can't then don't participate at all."

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asanwal
edit: Dec 2012 was the worst month for VC investment since August 2012

page 10 of this report --
[https://www.cbinsights.com/reports/Q4%202012%20Venture%20Cap...](https://www.cbinsights.com/reports/Q4%202012%20Venture%20Capital%20Activity%20Report.pdf)

Picking any month or quarter as suggestive of a trend is generally not going
to work. Funding #s get skewed wildly by mega-deals (throw in one big clean
tech or Groupon type of financing and things look great and if they're
missing, not so good). As of late, mega deals to clean tech have been non-
existent which has been a drag on numbers overall.

The Q4 2012 #s did show a decline vs the earlier quarters of 2012. The data is
here - [http://www.cbinsights.com/blog/trends/venture-
capital-2012-r...](http://www.cbinsights.com/blog/trends/venture-
capital-2012-report)

Re: exits -- again a single quarter doesn't make for a trend.

If we see sluggish investment and funding levels for many quarters, then there
may be reason for "concern" although it is probably a healthy purging of the
system in our view.

Note: Our company, CB Insights, tracks VC investment flows and exits. We
compete against Thomson (the provider of the NVCA data).

~~~
dmor
Thanks, I just signed up and I hope I'll be able to use your data to support
future blog posts.

While I agree that a single quarter doesn't make a trend, according to this
Crunchbase data there has been a steady decline over the past 10-12 months.
I'll have to dig into CBinsights to see whether this is similar in your data
set as well.

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asalazar
Here are three potential reasons.

1\. It could just be a random drop in the numbers. The VC world is VERY small
and there are VERY few players. Equally, VERY few deals get done every year.
Moreover, megadeals can really skew the numbers. So even seemingly small
randomness can have big effects on volatility. Heck, look at the chart!

2\. There's a well documented drop in the number of venture firms out there
and in turn with available capital. Less supply...

3\. Many venture firms have been burned by gaming and consumer oriented
investments and moving trying to move back to their IT roots. However, the
majority of angel and seed investing only recently started focusing IT so the
there could be a pipeline issue.

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loganfrederick
Related to mindcrime's comment, with data points updated monthly, there is a
lot of volatility in that graph and it's hard to draw conclusions. While
having that drastic a drop isn't inspiring news, it could be due to a number
of factors. To her credit, Danielle does not add her own causation theories
and merely quotes the NVCA's.

My point is that if next month jumps back to a number closer to recent trends,
the last month could easily be an outlier.

Now, if there is a continued depressed trend in startup investments over the
next six months, one could put forth a convincing case that new tax laws and
problems in the Euro-zone (as NVCA suggests) are hurting startup investments.

~~~
dmor
I absolutely agree, and hopefully there is a lag in investment reporting, but
I find the fact that the NVCA issued this report to Reuters and it was picked
up by the finance press by no one in tech strange as this is certainly of
public interest to the startup community. I've attempted to present the
information objectively.

~~~
crapshoot101
It is my impression that NVCA data is... ok at best; ie, there's many times
that they don't pick up on stuff till months, maybes years later.

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jswift
It could just mean that VC folks were on holiday in Dec. Interestingly,
investments have consistently taken a dip in Dec and shot up in Jan.

