5 ms·

There is Little to No Relationship Between Financial Runway and Startup Success

53 points by asanwal 13y ago

tlb 13y ago
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 13y ago
  Good catch ... this is eliminating an adequate amount of the relevant data.
loceng 13y ago
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.
x0x0 13y ago
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 13y ago
  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 13y ago
    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-minimize-success.html http://www.avc.com/a_vc/2013/09/maximizing-runway-can-minimi...
    - asanwal 13y ago
      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 13y ago
        No, it really doesn't imply that...
        asanwal 13y ago
        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
sliverstorm 13y ago
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.
throwa 13y ago
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
tlogan 13y ago
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...
mathattack 13y ago
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-minimize-success.html http://www.avc.com/a_vc/2013/09/maximizing-runway-can-minimi...
- asanwal 13y ago
  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 13y ago
    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?
nostromo 13y ago
I'd bet on Fred Wilson being right. As a VC he has access to raw deal data that this author does not.
- xfax 13y ago
  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 13y ago
    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.
madrox 13y ago
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.
btilly 13y ago
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.
hornbaker 13y ago
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.
carsongross 13y ago
Survival bias much?
deleted 13y ago
[deleted]

53 points by asanwal 13y ago

tlb 13y ago

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 13y ago
Good catch ... this is eliminating an adequate amount of the relevant data.

loceng 13y ago

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.

x0x0 13y ago

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 13y ago
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 13y ago
  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-minimize-success.html http://www.avc.com/a_vc/2013/09/maximizing-runway-can-minimi...
  - asanwal 13y ago
    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 13y ago
      No, it really doesn't imply that...
      - asanwal 13y ago
        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

sliverstorm 13y ago

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.

throwa 13y ago

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

tlogan 13y ago

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...

mathattack 13y ago

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

asanwal 13y ago
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 13y ago
  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?

nostromo 13y ago

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

xfax 13y ago
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 13y ago
  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.

madrox 13y ago

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.

btilly 13y ago

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.

hornbaker 13y ago

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.

carsongross 13y ago

Survival bias much?

deleted 13y ago

[deleted]