Q2 Venture Capital (VC) Investment Jumps 61% To $5.3Bn
According to ChubbyBrain, a New York based research company dedicated to democratizing startup and investor information, VCs invested a total $5.329 billion in Q2 2009. This represents a nearly 61% increase over the $3.314 billion of investment ChubbyBrain tracked in Q1 2009. This is partly a story about signs of recovery, which is very encouraging. It is also a story about trusting data and the research methodologies used to collect data such as this.
The Data Is What Matters
When the Q1 numbers came out, ReadWriteWeb did not share the general doom and gloom in the headlines. We reported the "dog did not bark" story when we said that VC Investment in Internet Deals Did Not Fall Off a Cliff. We did that because the headlines did not match what we heard from entrepreneurs and investors and what we saw from our own limited online research. We had been tracking a small segment of the market -- early-stage Web technology investments -- since the market meltdown in October 2008. In April, we started to work with ChubbyBrain so that we could have more confidence in the quality of the research, and we started to see healthy signs in April and May. It was clear that Q2 was going to look good. But it was critical that we were able to trust the numbers. The startup community makes decisions based on these numbers. The quality of the data matters.
What Is Excluded
The numbers would look a lot bigger if ChubbyBrain had included:
- Global Deals. This is only US deals
- Debt. This is only equity
- Private equity (which usually means leverage buyout). This is only VC deals.
- Angel investment (unless they invested with a VC Fund). This is only VC deals.
- PIPE deals (Private Equity Investment in Public Equity). This is only private companies.
We would have liked to include more angel and global deals. They matter to early-stage innovation, and that is what matters to entrepreneurs. But that would not have dramatically changed the numbers. But if you started adding debt and public companies, the numbers would become meaningless: these deals tend to be way bigger than VC deals. One public or leverage buyout deal would totally change the numbers.
Here are two other things we took care to report on accurately:
- For follow-on investments, we only recorded the portion of the investment made in the quarter, not the total of the announced round.
- The amount that actually closed, not the intended size of the round.
Most importantly, ChubbyBrain only includes deals that were verifiable via either (A) regulatory filings or (B) confirmation from firm or investor or (C) press release.
This process might miss some deals. So the total number maybe bigger than $5.3 billion. But we are confident that what ChubbyBrain has found is accurate.
Trends
Next week, we will be doing a deep dive into the segment that matters to the ReadWriteWeb community: Internet and mobile deals.
The quick takeaway from this early look is that money is available for early-stage startups. Despite conventional wisdom that venture firms would invest only to fortify existing portfolio companies, the quarter saw healthy levels of early-stage investment in seed and Series A rounds, accounting for 35% of the number of deals. This confirms the anecdotal evidence we get from talking to investors and entrepreneurs.
We do not see this as a sign that the general economy is recovering. It is too early to call that. But we do see this is very hopeful news for entrepreneurs. And what is good for entrepreneurs tends to be good for the general economy at some point in the not-too-distant future.
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How can you be confident that Chubby Brain's statistics are accurate? It's a wiki. The VentureSource and NVCA quarterly reports, which they have been producing for more than a decade, include surveys to all the venture capital firms which report a lot of unpublished fundings and clarify deal amounts. These research organizations are made up of dozens of researchers or ensure the data is as accurate as possible. Watch for those numbers next week - they are the real indicators, not some wiki.
Dave,
Thanks for the comment. We think the numbers speak for themselves so we'll start with those. VentureSource just came out with their number today and reported $5.3B. ChubbyBrain whose numbers came out five days ago reported $5.329B.
But given your concerns, we would love to talk with you so feel free to drop me a line at asanwal(at)chubbybrain(dot)com. In the interim, let me provide some context for our process and the rigor employed in collecting the data. In addition, I've also included several examples of inconsistencies in the the sources you site which illustrate the existing imprecision in measuring venture capital activity. These data points also support why we think a technologically-driven third data point in the discussion around venture capital funding is useful.
First Point - Our Process and Rigor
The data that forms the basis of our Q2 report comes from extracting information from a wide variety of sources, e.g., regulatory filings, press releases, etc and through direct conversations with investors and startups.
In addition, as you mentioned, our platform is a wiki. It is worth noting that much of the information comes from the above-mentioned information extraction methods but by leveraging a highly moderated wiki such as ChubbyBrain, there is useful information to be captured through user contributions as long as it is checked/verified which we do. Generally speaking, it is dangerous in today's world to dismiss mass collaboration as a means to capture better information, build a better product, etc especially with examples like Wikipedia, Linux, etc who've successfully been able to do this.
The 9 page document we issued along with our Q2 results can be found at the below link. It has a page detailing our methodology, process and rigor in collecting the data. I've copied details of our process at the end of this comment as well.
http://www.chubbybrain.com/blog/2009/07/venture-capitalist-activity-up-61-in-q2-2009-is-the-worst-over/
Second Point - Current Data Inconsistencies and Why The Technologically Driven 3rd Data Point We Provide is Useful?
We firmly agree that the Dow Jones and Thomson data points are very valuable in the discussion of VC activity and that they're trailblazers in this arena. We, however, know that they are not infallible. Given the importance that startups and the investors that back them play in our ability to innovate and grow as a country, we do think a technologically-driven solution to arrive at this data in addition to the survey methods already used is valuable, and here is why:
(1) While there are numerous reasons cited for issues with the survey method to conduct research (wikipedia has many examples), two primary ones are around (a) response rates and (b) the time it takes to get feedback.
This post from this week in the online WSJ, for example, acknowledges the waiting required to get responses for the quarterly report.
http://blogs.wsj.com/venturecapital/2009/07/15/expect-a-healthy-surprise-in-2q-venture-funding-report/
As a sidenote, It's also worth noting that the above article's VC trends were in-line with the numbers we put out several days ago.
(2) Even with the rigor the existing surveys offer, there are startling differences between the two. By way of example, let's take a data-driven approach and examine historic reports by both parties.
-- There was a nearly $890M difference in total funding activity b/w the two in Q1 '09. On $3 to $4B of total investment, this is a material difference. In general, it is worth nothing that DJ shows higher investment funding levels.
-- In 2008, on a # of deals basis, the average quarterly difference between the two was 310 deals. On anywhere from 600-1000 deals per quarter, having a difference of 300+ again is very significant and points to issues in the underlying process. In general, we've observed Thomson shows higher deal count numbers.
-- By combining the two metrics above for each provider to look at average deal size, we see another striking difference. Dow Jones would have average deal sizes from Q1 '08 to Q1 '09 of $10.6M while Thomson would have $6.9M for a delta of $3.7M. Again, a very material differential.
-- And lastly, let's look at who both report as the most active investors from their Q1 '09 report. Thomson listed Oak Investment Partners as the most active investor in Q1 '09 and Dow Jones doesn't have them in their top 7.
The main point of highlighting the above differences is that it underscores that the collection of this data is difficult and has historically been varied and imprecise. For this reason, we think our use of technology and mass collaboration offers another useful, rigorous and highly credible data point about VC activity. Also because of our methods, we are able to get the data out quicker as illustrated by our report being out earlier this week 5-7 days ahead of other sources.
Our methods to collect data are continuously getting more sophisticated and we look forward to continuing to improve the quality and rigor by which we aggregate VC funding activity. Again, if you have any questions or further comments, don't hesitate to be in touch with me directly at asanwal(at)chubbybrain(dot)com.
Below is the details on our process/methodology as promised directly from the Q2 '09 report we issued.
Regards,
Anand
co-founder, ChubbyBrain
http://www.chubbybrain.com
asanwal(at)chubbybrain.com
Research Methodology
Because there are often many numbers floating around about venture capital activity in the quarter, we’ve tried to detail the rules we use to pull our numbers together so you understand our process and also have a better understanding and insight into the numbers you see in the following pages.
What is included?
· Only fundings in the USA with participation from venture capital firms
· For follow-on investments, only the portion of the investment made in the quarter – not the total round/series is included.
· Amount that has closed – not the intended size of the round
· Only verifiable fundings for the quarter either confirmed by (1) regulatory filings (2) direct confirmation with firm or investor or (3) press release.
What is not included?
· Angel investment by angel groups or angel individuals (unless there was participation from a venture capital firm as well)
· Private equity firm investments
· Private placements aka PIPEs, Private Investment in Public Equities
· Debt issued to emerging, startup companies
· Grants by government or state bodies to emerging, startup companies