From “the plural of anecdote is not data” file, Fred Wilson of top vigintile New York venture capital firm Union Square Ventures had a post this morning positing that companies that raise larger seed and Series A rounds are less successful than those that raise smaller rounds. He does more than speculate, however, writing:
The fact is that the amount of money startups raise in their seed and Series A rounds is inversely correlated with success.
As a data firm, the words “fact” and “inversely correlated” meant we had to test this using CB Insights VC data. And the fact is that runway has no or at best a very weak relationship (R2 of 0.0216), with startup success or failure. It’s actually quite random as you can see.
To do this analysis, we analyzed US high tech companies (as we assumed Fred was talking tech given his focus) and excluded life sciences, clean tech and energy outcomes. 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.
UPDATE – We got some great feedback in the comments to this post and on Hacker News that this analysis suffered from Omitted Variable Bias because we did not include startups that failed. And so this AM, we reran the numbers including these outcomes. The plot below illustrates that even with startup failures included, no significant correlation between initial runway and success exists.
If you liked this analysis, here’s some more from “the plural of anecdote is not data” file:
- Signaling risk – Anecdotes suggest that when large VCs invest in your seed round, that can spell trouble if they don’t follow on. This is wrong.
- Party rounds are bad – If too many investors are in your round, nobody has enough skin in the game so when you need follow-on money, you’ll have a tough time raising it. Wrong.
- 1 of 10 investments in a VC portfolio is a homerun – You’ll often hear that if a VC invests in 10 companies, 6 maybe duds or breakeven, 2-3 will be singles/doubles and 1 will be a homerun. The reality is that the the billion dollar exits (homeruns) are much much less common – only 2.5% of all private company tech exits in 2012.
This report was created with data from CB Insights’ emerging technology insights platform, which offers clarity into emerging tech and new business strategies through tools like:
- Earnings Transcripts Search Engine & Analytics to get an information edge on competitors’ and incumbents’ strategies
- Patent Analytics to see where innovation is happening next
- Company Mosaic Scores to evaluate startup health, based on our National Science Foundation-backed algorithm
- Business Relationships to quickly see a company’s competitors, partners, and more
- Market Sizing Tools to visualize market growth and spot the next big opportunity