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VC Plummets to 12 Year Lows? Angel Investors Fund 27x More Startups? Why We Need To Understand the Numbers

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There is a very interesting post entitled Angels Finance 27 Times More Start-ups than VCs on Basil Peters’ AngelBlog which is worth a read.  We definitely agree with Basil that there are more angel deals than VC deals based on the data and trends we observe at ChubbyBrain, and so highlighting this is a valuable service especially to entrepreneurs who may want to use the information to determine where they want to focus their attention.

However, his post brings to light a glaring issue related to private funding, and that is the lack of transparent information relating to specific angel and venture capital deals – the very information that should feed macro-level data that then enables writers to conclusions about investment trends.  Specifically, the issue is that high-level, nebulous macro numbers get published by organizations and then those numbers get quoted repeatedly with little real transparency into: 1) the numbers/drivers behind the numbers and 2) the methodology used to capture the figures.

As those who we’ve talked to know, we at ChubbyBrain from our prior work in VC and/or corporate innovation have been left underwhelmed with many of the more prominent and widely-used sources that capture VC funding information.  Their data is erratic and held in a bit of black box (or black hole depending on your perspective) and aggregated in ways that make them highly susceptible to error.  And we’re not alone.  Bruce Bigelow at Xconomy highlighted this recently commenting on Q1 2009 venture investments that “the results between the DowJones VentureSource and NVCA surveys often vary, because each uses different survey methodologies and relies on different business networks to collect their data.  But the differences were especially apparent this time among the biggest venture deals reported by each survey.”

Bernard Lunn of ReadWriteWeb also talked about this in his recent post entitled “VC Investment in Internet Deals Did NOT Fall of a Cliff” as he peels back the data on early stage deals in the internet arena.  He agrees that there is a decline, but not quite as precipitous as all the headlines seem to suggest.  Here’s the doom & gloom headline that Bernard quotes which does a nice job of capturing the “sky is falling” sentiment: “Venture Capital investment plummets in Q1 2009 to 12 year low”.  His examination of the data showed a decline but not what would seem to be a “plummet”.  Yes, the plummets headline was a commentary on the macro-VC trend, but the problem is that a lot of nuance gets lost in these high-level attention-grabbing headlines.  As Bernard points out on RRW, “Now, you may read a lot of doom-and-gloom headlines.  Our headline is more like, “The dog did not bark”. Yes, we know that does not sell newspapers! Read on, though, if you want to go beneath the headlines and see what is happening in web technology investing.”

In line with Bernard’s viewpoint, ChubbyBrain is trying to get beneath the headlines and in the process, we hope to democratize information about startups and private investors, e.g., venture capitalists and angel investors.  In the interests of full disclosure, we realize that we are not quite there yet.  The gaps of information are so large that they cannot be solved overnight.  That said, after a mere 2.5 months of public existence, we already have thousands of VCs as well as hundreds of angel investors (groups and individuals) on the platform.  Of course there’s much more work to be done, and we’ll continue on our path and hopefully reduce the information asymmetry that exists.

With all that said, let us get back to Basil’s excellent post which we believe is correct directionally.  The issues we’re highlighting are with the macro figures.  He quotes a couple of sources including the Federal Reserve who estimated that there were 50,300 angel-backed companies in 2003.  He also quotes the Center for Venture Research, part of the University of New Hampshire, which cites 55,480 startups receiving angel funding in 2008.  The numbers definitely point to a fairly significant boost of angel investment activity, which we agree with directionally.  But again, we think it’s very important to get under the headlines and observe the actual deals and understand how the macro figures were arrived at in a bottoms-up fashion.  Specifically, we hope folks who know the Fed or Center for Venture Research numbers can enlighten us on the following fronts:

  • How has angel investment been defined in these studies?  Do we have “friends & family” in these numbers?
  • What is the sampling methodology to get this information?
  • Do we know which startups received funding, e.g., are these traditional type of business models (retail/restaurants perhaps) or are they things that are capable of generating the 10-30x returns we hear angel investors seek?
  • Why not publish the list of investments/startups?  We’d all love it for free, but even charge for the list of startups if you must.  We’d imagine that many a venture capitalist or corporate venture group would be very interested in seeing what early stage concepts are out there that they can potentially invest in.

At ChubbyBrain, we’ll continue to work on getting “under the hood” as it relates to transaction data for both VCs and angel investors, and we’ll look to share some of our aggregate  findings with you in the near to medium-term.  In the interim, we hope interested parties will continue to explore the data to ensure that the right conclusions can be drawn from these macro-level numbers.

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