
Startup Growth and Venture Returns - ed
https://angel.co/blog/venture-returns
======
drinkzima
"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.

~~~
mateo411
Yes, I suspect there is some survivorship bias in this analysis.

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aaavl2821
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](https://www.baybridgebio.com/blog/anatomy_of_a_decacorn.html)

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

~~~
yowlingcat
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?

~~~
aaavl2821
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

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

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aazaa
> 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.

~~~
rdlecler1
Or we are going through a massive shift where tech is being deployed across
the entire economy.

~~~
TomMarius
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.

~~~
chii
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).

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

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dang
The report is at
[https://angel.co/pdf/growth.pdf](https://angel.co/pdf/growth.pdf).

~~~
realsimoburns
Thanks - saved a click! Appreciate it

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racketracer
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?

~~~
aabhay
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.

~~~
racketracer
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?

~~~
chii
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.

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mNovak
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?

~~~
aothman
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.

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thesausageking
AngelList study concludes you should invest on AngelList.

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cactus2093
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.

~~~
john_moscow
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.

~~~
AznHisoka
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.

~~~
aothman
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.

