Hidden First Rounds

This post is by Ian Hathaway from Blog - Ian Hathaway

One of the drawbacks of venture capital databases is that they are dynamic. Information trickles in, often with significant time lags. This is especially true at the earliest stages, where rounds are often unannounced and many startups are too small for anyone to notice. It’s a structural challenge that I’m not sure will ever be fully resolved.

The underreporting and time lags associated with very early deals has become further compounded in recent years. Many startups in Silicon Valley and other leading startup hubs have increasingly relied on unpriced rounds (SAFEs or convertible notes) for their first or even second rounds of financing. Because these rounds are unpriced, they don’t appear in a company’s cap table until after it has raised a priced round later (and further, announced the deal—see above).

Combined, there are structural and cyclical reasons that the underreporting of very early venture rounds is especially acute now and fraught with severe reporting delays. This matters because people want to understand the market trends in near real time.

To test how much of a problem this has become, I grabbed data on first financings from an analysis I did last year and compared them to first financings from a data pull today. The chart below shows the number of first financings in US companies between 2005 and 2017, as reported 14 months ago in August 2018 (light bars) and as reported today (dark bars, residual). The green line shows the percentage increase in reported deals between these (Read more...)