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.
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.
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]
Exit size doesn't matter on its own - you have to take into account how much equity you own. 40% of $100 million exit is better than 10% of $300 million - as an example. I would describe the first scenario as more successful than the second.
I am taking this from the founder's point of view, where no money is paid to buy the equity. You highlight the good point that it depends on the context and point of view - who's success is being talked about.
To further my other comment - I'm a regular commenter at AVC.com and Fred generally talks from the perspective of what's best for the founder, for the entrepreneur. This is why I am making these insights.
Thx for the comment. We are updating the brief with all the zeros as we have the data.
You are right that the line would point down if all failures raised a lot of money at the seed/Series A stage, but that's not the case. This intuitively makes sense as only a small select group of companies/founders can raise large initial rounds (serial entrepreneur, amazing traction, etc) and most will raise smaller sums.
But thx for comment. Update with zeros coming soon.
You're making strong assumptions about his methodology vs a guy that is only looking at public ally available exits. I would be remiss to say that his data most definitely supports his position.
Not to mention that exit valuation is a dubious metric of startup success to begin with. It also excludes startups that don't exit. Airbnb, Dropbox, etc wouldn't be included.
I think you need to look at this from Fred Wilson's perspective as a VC. Exit is the only the measure of success. It is how he and every VC is ultimately incentivized by their LPs. The more exits and the larger those exits, the more money the VC makes and the more likely they'll have LPs invest in their next fund.
Of course, one can argue that startups should be not be in it for the exit, but when you take VC money, that is what you are signing up for.
As a VC the startups that don't exit are crucial to the analysis. For their purposes they should be included with an exit value of zero.
Say the startups with the highest (or lowest) funding all die before exiting -- that's a really important thing to know. That'd affect the regression outcomes (not to mention the decision-making process of everyone involved.)
[1] http://en.wikipedia.org/wiki/Omitted-variable_bias