This is one of the best quantitative startup analyses I've ever read. I keep coming back and re-reading it. Please keep sharing your insights and analysis.
I love how throughout the Newsletter I'm like: "Where is Nnamdi going with this?" Then I re-read it and realise heaps of the dots I have not been able to connect, were just connected. Thank you!!! I'm a big fan of the Newsletter.
Have you done any analysis to determine whether the quality of the dataset is consistent over time? I understand pitchbook’s data is primarily sourced through manual processes - I wonder if their increased headcount over the period has resulted in them capturing more deal data around seed over time (vs later stage where there has always been more media/ corporate focus).
I did think about this a bit -- I think it's hard to know with certainty how the dataset quality has changed over time. I'm sure quality has improved, and thus more data is being captured. Then again, I also think there were many fewer companies raising seed rounds a decade ago, and thus it's easier to track down every round that happened back then. I can see both sides!
"Capital has been in excess supply the last decade, but ventures haven't."
I really appreciated this decomposition - something many miss at first glance, that record nominal volumes can coincide with anemic growth in "real" funding opportunities.
"The supply of late-stage startup equity hasn't risen to match investor demand."
Immediately made me think of Tyler Cowen's The Great Stagnation hypothesis.
Do you have a working hypothesis?
Is startup formation fundamentally hard / constrained in the near term, or do you have available levers in mind for increasing startup equity supply?
My working hypothesis is that startup supply is quite constrained in the short-run. Some folks find this hard to believe given all the headlines about fundraises, but I actually think it's quite difficult to increase the quantity of investable startups and that credible founders remain in short supply.
Re increasing supply -- I'd separate two things: (1) venture backable startups and (2) non-venture backable startups. I think supply is much more constrained on the former than the latter, though non-venture new company formation has definitely fallen over time. I don't have a good answer for increasing the supply of venture backable startups at this time, but I think its critical to the future growth of the ecosystem. Definitely worth thinking more about, and I'm open to suggestions!
I largely share your hypothesis on the constraints, particularly for venture-backable startups. I think doing great writing and investing and founding or working for startups (and other forms of social proof) changes norms and increases supply at the margin...but not by much.
I'm inclined to flip the question, and say, "Instead of increasing the supply, how might we stop destroying it?"
Munger famously said, "It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.
So if we can stop eating ourselves to death (90%+ of Americans with metabolic disorders can't be good for our ability to focus on building anything) or reduce environmental toxicity or eliminate occupational licensing and make it easier to build things...that might account for some real gains at the margin.
I think demographic decline / fertility is underappreciated. Places with children have a future, and children are a giant forcing function for investment. I notice how Israel and Utah punches so far above their weight in startup formation. NYC and SF rely on imports for their youth. Aging, already-wealthy societies are optimizing taxes and pensions and thinking about how to maintain entitlement transfers from a dwindling working population...that's the death knell for a society that is focused on building the future. Not sure how or if we will address this looming problem, even if the U.S. is spared the worst consequences.
More speculative skills-based immigration to the US would be a tremendous human capital unlock. Lots of smart people are forced to live and labor in places that tragically waste their potential. Simply stepping foot in a place with rule-of-law and functioning capital markets and social institutions is a 100x lever on human potential.
This is one of the best quantitative startup analyses I've ever read. I keep coming back and re-reading it. Please keep sharing your insights and analysis.
I love how throughout the Newsletter I'm like: "Where is Nnamdi going with this?" Then I re-read it and realise heaps of the dots I have not been able to connect, were just connected. Thank you!!! I'm a big fan of the Newsletter.
Have you done any analysis to determine whether the quality of the dataset is consistent over time? I understand pitchbook’s data is primarily sourced through manual processes - I wonder if their increased headcount over the period has resulted in them capturing more deal data around seed over time (vs later stage where there has always been more media/ corporate focus).
I did think about this a bit -- I think it's hard to know with certainty how the dataset quality has changed over time. I'm sure quality has improved, and thus more data is being captured. Then again, I also think there were many fewer companies raising seed rounds a decade ago, and thus it's easier to track down every round that happened back then. I can see both sides!
"Capital has been in excess supply the last decade, but ventures haven't."
I really appreciated this decomposition - something many miss at first glance, that record nominal volumes can coincide with anemic growth in "real" funding opportunities.
"The supply of late-stage startup equity hasn't risen to match investor demand."
Immediately made me think of Tyler Cowen's The Great Stagnation hypothesis.
Do you have a working hypothesis?
Is startup formation fundamentally hard / constrained in the near term, or do you have available levers in mind for increasing startup equity supply?
My working hypothesis is that startup supply is quite constrained in the short-run. Some folks find this hard to believe given all the headlines about fundraises, but I actually think it's quite difficult to increase the quantity of investable startups and that credible founders remain in short supply.
Re increasing supply -- I'd separate two things: (1) venture backable startups and (2) non-venture backable startups. I think supply is much more constrained on the former than the latter, though non-venture new company formation has definitely fallen over time. I don't have a good answer for increasing the supply of venture backable startups at this time, but I think its critical to the future growth of the ecosystem. Definitely worth thinking more about, and I'm open to suggestions!
I largely share your hypothesis on the constraints, particularly for venture-backable startups. I think doing great writing and investing and founding or working for startups (and other forms of social proof) changes norms and increases supply at the margin...but not by much.
I'm inclined to flip the question, and say, "Instead of increasing the supply, how might we stop destroying it?"
Munger famously said, "It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.
So if we can stop eating ourselves to death (90%+ of Americans with metabolic disorders can't be good for our ability to focus on building anything) or reduce environmental toxicity or eliminate occupational licensing and make it easier to build things...that might account for some real gains at the margin.
I think demographic decline / fertility is underappreciated. Places with children have a future, and children are a giant forcing function for investment. I notice how Israel and Utah punches so far above their weight in startup formation. NYC and SF rely on imports for their youth. Aging, already-wealthy societies are optimizing taxes and pensions and thinking about how to maintain entitlement transfers from a dwindling working population...that's the death knell for a society that is focused on building the future. Not sure how or if we will address this looming problem, even if the U.S. is spared the worst consequences.
More speculative skills-based immigration to the US would be a tremendous human capital unlock. Lots of smart people are forced to live and labor in places that tragically waste their potential. Simply stepping foot in a place with rule-of-law and functioning capital markets and social institutions is a 100x lever on human potential.
Yep. There's good research by an old professor of mine that suggests higher birth rates / younger population lead to more entrepreneurship: https://www.gsb.stanford.edu/insights/rethinking-relationship-between-age-business-acumen-entrepreneurship