

There is Little to No Relationship Between Financial Runway and Startup Success - asanwal
http://www.cbinsights.com/blog/trends/startup-runway-success-fred-wilson

======
x0x0
The author is claiming a one independent variable regression explains
something. Starting with ommitted-variable bias [1], I don't think this shows
much. The author only looks at

    
    
       high-tech companies which had raised a Seed or Series A round AND which had 
       exited and where an exit valuation was available
    

a bad analysis does not create meaningful information. At bare minimum, to
gain any real insights, you need to include startups that failed.

[1] [http://en.wikipedia.org/wiki/Omitted-
variable_bias](http://en.wikipedia.org/wiki/Omitted-variable_bias)

~~~
asanwal
The analysis is only looking at whether there's a strong negative correlation
between initial funding and startup success, using exit valuation as a
measure, as this was Fred Wilson's assertion.

Of course, this is not meant to be predictive but rather meant to dispel the
notion that a strong negative correlation exists between these two variables.

~~~
j_baker
I don't see where Fred says that exit valuation is a metric. His blog post on
the subject never includes the phrase "exit valuation".

[http://www.avc.com/a_vc/2013/09/maximizing-runway-can-
minimi...](http://www.avc.com/a_vc/2013/09/maximizing-runway-can-minimize-
success.html)

~~~
asanwal
He is a VC, and a good one, so success = exit valuation by definition. This is
implicit when a VC is talking about success.

Fred talks about he defines success here -
[http://www.avc.com/a_vc/2010/06/how-we-measure-
success.html](http://www.avc.com/a_vc/2010/06/how-we-measure-success.html)

"We are financial investors and we do want to see our portfolio companies
become valuable."

~~~
loceng
No, it really doesn't imply that...

~~~
asanwal
Sorry, but I don't understand this comment. If exit size is not one of the
primary metrics VCs look at and how they define success, I'm at a loss for
what would be.

More specifically, how do you think USV and Fred define success? Fred says
that financial returns (hence exits) are important on his own btw [1]

[1] [http://www.avc.com/a_vc/2010/06/how-we-measure-
success.html](http://www.avc.com/a_vc/2010/06/how-we-measure-success.html)

~~~
loceng
Exit size doesn't matter on its own - you have to take into account how much
equity you own. 40% of $100 million exit is better than 10% of $300 million -
as an example. I would describe the first scenario as more successful than the
second.

~~~
legutierr
If you paid $50 million for the 40% and $5 million for the 10%, I think you
would be hard-pressed to describe the 40% investment as more successful.

~~~
loceng
I am taking this from the founder's point of view, where no money is paid to
buy the equity. You highlight the good point that it depends on the context
and point of view - who's success is being talked about.

------
tlb
Interesting. As a nitpick, this:

    
    
      Specifically, we looked at high-tech companies which had raised a Seed or
      Series A round AND which had exited and where an exit valuation was available.
    

skews things, because startups that exit for less than the amount of funding
received are less likely to have their acquisition price reported publicly. It
eliminates points from the bottom right of the graph, which could be
responsible for the apparent positive correlation. Perhaps Fred would be right
if those data points weren't excluded (and he does have access to those data
points for his own companies).

~~~
loceng
Good catch ... this is eliminating an adequate amount of the relevant data.

------
loceng
You have to understand first the context and that is the biased view that Fred
has based on the companies he / Union Square Ventures invests in - and for
where he'll see the most data from.

Also, you have to define success - and success for who? If you take a larger
Series A, that likely means founders are diluting more - and possibly previous
investors. The idea being that if you can take as little as possible and find
other means to grow and continue to develop product - other than throwing more
money at it - then you'll be more 'successful' \- whatever success means to
you.

If how much you sell a company for is your what you care about, and not how
much equity you have out of it - then cool - but 40% of something worth $100
million, is better than 10% of something worth $300 million.

------
btilly
It is good to look at the data, but Fred Wilson's assertion is not necessarily
wrong. Data notwithstanding.

There are a large number of reasons why getting too much money is bad for a
company. See the "Don't raise too much" section of
[http://www.paulgraham.com/fr.html](http://www.paulgraham.com/fr.html) for
some of it. If you want a much more thorough analysis (albeit in a different
context), the negative dynamics of too much money are studied in detail in
_The Innovator 's Solution_.

That said, investors like Fred Wilson are aware of this risk. Therefore they
will attempt to avoid investing too much in companies that can't handle it.
Thus the fact that a company received more money means that, in the judgement
of investors, it was a company that could absorb more money. If the investors
do their job well, you would therefore expect to see little to no correlation
between the amount invested in a startup and the subsequent success of said
startup.

The right analysis is impossible to do. But it is to compare what a competent
investor (eg Fred Wilson) thought a company could handle, compared to what it
got, and see if there are correlations there.

------
mathattack
Let's go to the original post [1]. Fred says "To my mind, maximizing runway is
not the game startups should be playing. Getting somewhere fast is the game
they should be playing." This is consistent with the VC playbook. They invest
in high growth companies and want to fund expansion, not an extension of "As
is".

Let's look at a few issues with the OP's analysis:

1) As others mentioned, there is a survivor bias.

2) Runway should be measured in months, not in millions. Size of funding to
log size of exit is the wrong metric. Months of runway to IRR of exit is the
better comparison.

3) I forgot what #3 was.

Even when the counter-argument isn't great, I still like the discussion.

[1] [http://www.avc.com/a_vc/2013/09/maximizing-runway-can-
minimi...](http://www.avc.com/a_vc/2013/09/maximizing-runway-can-minimize-
success.html)

~~~
asanwal
Thanks for the comment.

1) We include asset sales/talent acquisitions but yes, private company data is
imperfect. That said, we have the best in the biz (highly biased)

2) Runway in months and millions is semantics. If you have more millions in
the bank, you have a longer runway in months almost by definition. IRR of exit
- not sure I follow how that is better (and more importantly, an impossible
metric to get at scale for private companies)

3) Agree :)

~~~
mathattack
Thanks for the reply. On #2 - isn't runway money/burnrate? I always viewed it
as measured in months. "We have 12 months of runway" versus "we have 24
months". I mention this because the original Wilson post was encouraging
people not to stay too lean purely to increase the runway, implying the runway
could be variable for a given amount of money.

IRR data is semi public, no? Isn't it possible to see how much a company gave
up in the A round by comparing valuation to money raised? Then back out the
IRRvat the IPO?

------
tlogan
Very interesting graph. But this is kinda obvious - success of startup is
really about team, product and market. The way how company raises money (or
not) it should not really matter. If a way how company raises money really
matters, then VCs will care less about team, product, and market and more
about who is investing with them and how much money is needed. Which is
obviously not true...

------
madrox
Statistically speaking, the interpretation of the regression is "there is no
correlation between the duration of financial runway and a startup's exit
valuation."

It could be whether or not you have a runway could impact whether or not you
have an exit.

------
throwa
In addition to the discussion here, you can also follow the discussion on
fred's article here.
[https://news.ycombinator.com/item?id=6408318](https://news.ycombinator.com/item?id=6408318)

------
hornbaker
It'd be helpful to see this study normalized for ROI over time, which is
arguably a better measure of VC success than exit size.

Doing so might very well make Fred's contention hold up.

------
nostromo
I'd bet on Fred Wilson being right. As a VC he has access to raw deal data
that this author does not.

~~~
xfax
Does he though? Sure, for USV investments it would make sense. But I'd be
surprised if other VCs shared data on their failed investments with him or his
firm though.

~~~
nostromo
I can't imagine a more skewed data set for fundraising and exits than news and
PR. I'd much rather look at the raw data for a single firm in the absence of
industry-wide data.

------
sliverstorm
It seems like someone misinterpreted here. This plot specifically excludes
startups that went bankrupt or were otherwise terminated, which is what _I_
would consider "failure".

As best I can tell, this plot is "runway vs. degree of success" rather than
"runway vs. rate of total failure", which I think would be the more
interesting plot.

------
carsongross
Survival bias much?

