This post is by Sergio Marrero, CEO and Founder of ALEX, Anyone’s Learning Experience.
New to the startup scene and entrepreneurship and want a quick overview of the major trends and activities in the space? Keep reading.
Below is a brief synopsis from the first part of my graduate thesis on startup studios. After a few years of working in the space I wrote this to synthesize the major facts and trends that I felt become ‘common knowledge’ once you spend time working in the startup community.
The research covers the major players in the space including founders, investors (venture capitalists and angels), educational institutions, incubators, accelerators, companies (including startups), and government bodies from sources such as Crunchbase, CB Insights, the Kauffman Foundation, Harvard Business School, the National Venture Capital Association, and more.
Rate of entrepreneurship
Overall while startups and ‘Silicon Valley’ have become a more popular topic of interest, the level for start-up activity has steadily declined over the past 5 years since 2011, In particular the number of new entrepreneurs and the startup density, number of start-ups compared relatively to the population, have trended downward.
Launching startups is challenging, with over 95% of startups failing. Venture backed startups has a slightly lower rate of failure at 75%. There has not been any indication that the level of difficulty in launching a venture has changed.
Another trend that remains fairly consistent is the expected time from founding date to exit primarily ranged from 4–8 years according to Crunchbase. This remains consistent with the Dow Jones VentureSource report in 2010 that stated the timeframe from idea to exit was just over 5 years. According to venture capitalist Michael Skok the average time to exit is trending upwards in part due to companies staying private for longer timeframes.
A recent trend is the decreasing cost of testing and experimentation. Focusing on websites, years ago it was necessary to hired engineers costing hundreds of thousands of dollars to develop a website from scratch. Now part-time development talent can be outsourced from companies such as Upwork (formerly Odesk and Elance), in some cases, below $20 an hour. With off the shelf testing options from Shopify.com and Square.com starting at $9/month working minimum viable products (MVPs) can be launched in hours. For physical products, with the advent of 3D printing, cost of printers has decreased from thousands of dollars to hundreds. Even if buying a 3D printer is prohibitive, outsourcing options such as Shapeways and 3D Hubs increase accessibility., The decreasing cost of experimentation, with tools such as Shopify, Squarespace, InVision, and Sketch, is making it easier and less expensive for entrepreneurs to prototype and test concepts before dedicating substantial resources.
Of the individuals starting companies, founders are increasingly male, with the representation shifting from 56% in 1996 to 63% in 2014. By race, whites make up a declining majority from 77% in 1996 to 59% in 2016, with the fastest growing group by proportion being Latinos at 22%. The representation of immigrants, founders from 55–64, and college graduates has increased as a proportion of entrepreneurs. Possibly driven by the increasing cost of higher education as a pathway toward acquiring wealth for immigrants and the increasing need for older professionals to work past retirement age or find new work at older ages.
Specifically focusing on female entrepreneurs, although they represent a decreasing percentage of total founders, they are outperforming their male counterparts on multiple levels. Companies with female co-founders perform 63% percent better than all male teams and in absolute number, teams with at least one female founder have quadrupled from 2009 to 2014 according to Crunchbase.
Investors and funding
While the level of entrepreneurship has been declining relative to the population, the level of investment in ventures has been increasing. The amount of venture capital funding has been trending upward and 2015 had $58.8B in venture capital investments, the second highest full-year total in the last 20 years. By dollars invested, the largest proportion of funds, 67%, was invested in later stage and expansion deals.
Software was the leading sector with 41% of the investment dollars, followed by biotechnology and media and entertainment each at 12%. These investments were highly concentrated with three regions (Silicon Valley, NY Metro, and New England) representing over 70% ($34.1B) of the total 2014 venture capital investments. Although Silicon Valley and New York represent a large concentration of investment dollars, startups outside of those areas perform slightly better than their peers based in those regions. In addition, the number of active venture capitalists has increased more than 3 fold to 635 in 2014 from 184 in 1995 while the capital under management increased from $38.9B to $156.5B for the same time period. The total number of venture capital deals increased 229%, from 1,897 to 4,361 from 1995 to 2014. While venture capital investments have increased, the vast majority of investments, 55% return less than the amount initially invested. In addition the value creating investments are highly concentrated. According to Ramana Nanda, a professor at the Harvard Business School, about 6% of investments account for over 50% of the total portfolio returns on average. This causes venture capitalist to focus primarily on a small number of investments expected to provide the largest return on investment.
Angel investors, who also play an important role funding startups, made 4,719 deals in 2015 totaling $7.5B. Investments were concentrated in the healthcare and software space, both totaling about 52% by investment dollars and by number of deals. Also investments have increased in size across the board with angel-only rounds shifting on average of $300K to $800K from 2010 to in 2014 and co-investment rounds increasing from $1.4M to $2M. California and the Great Lakes are the regions leading the investment activity representing 32.8% by number of deals and 34% by dollars. Notable organizations of angels focusing on early stage investments include the ARC Angel Fund NYC.
Another trend is the decreasing rate of IPOs and the increased number of extended private funding rounds. Activity peaked in 1996 with over 800 IPOs and has now fallen below 200 for the year in 2015. Only 14% of those IPOs in the U.S. were tech companies. Companies have delayed going public for longer periods as non-traditional private market investors (hedge and mutual funds, private equity, sovereign wealth, corporations) have provided capital via ‘mega-financings’. The average raised in these large private financings has increased from $85M in 2013 to $111M in 2015. Also asset managers like BlackRock, Fidelity, and T Rowe Price are increasing investments in pre-IPO growth capital that are making pre-IPO ‘unicorns’, new ventures valued over $1B, possible.
In the latest news, VC investing has declined. Amit Mukherjee of New Enterprise Associates (NEA) found that investments declined 32% from Q3 to Q4 of 2015, and 39 down rounds have occurred since the beginning of Q4 2015 (compared to the 19 that occurred in the first 3 quarters of 2015). Investor sentiment indicate a market correction is occurring and company valuations have hit their peak a few months ago and are on a decline.
Entrepreneurship has become an increasingly popular topic, is suspected to be the impact of the millennial generation’s preference for more “control, flexibility, and purpose in their work”. As a result of recent trends educational institutions have begun to offer more entrepreneurship related courses. Institutions that historically remain top ranked by U.S. News for both graduate and undergraduate programs focused on entrepreneurship include Harvard, Stanford, UPenn Wharton, Massachusetts Institute of Technology (MIT), University of California (Berkeley), Chicago Booth, Kellogg, Columbia Business School, and Babson. Universities are valuable for creating magnets for talent, sustained investment in research and development, and fostering a cluster of innovation activity. Most notably MIT has been called a ‘Factory for Innovation’ yielding over 300 companies a year totaling over 33K to date that employ over 3 million people and generate sales of over $2 trillion annually.
University endeavors focusing on entrepreneurship worth noting include Cornell University’s development of Cornell Tech, a graduate applied engineering program with a campus opening on New York City’s Roosevelt Island in 2017. They are partnering with the city to grow and amplify the tech ecosystem to New York City.
Incubators and accelerators
The number of accelerators and funded accelerated startups globally has increased. Over 235 accelerator programs have been started worldwide, accelerating over 5,688 companies. They have been associated with 694 exits and invested almost $13B. The leading incubators in the space are Y Combinator (YC), Techstars, and 500 Startups representing 17%, 12%, and 7% of the total companies accelerated respectively. While they collectively represent about 36% of the total start-ups, they represent 74% of the total funding invested and 69% of the total returns across all incubators.
In addition accelerators are experimenting in moving upstream and providing startups with later stage investments. The latest example of this is YC raising a $700M fund in 2015 to provide select graduates of their program with follow-on investments.
Companies / Consultancies
Companies and consultancies have both increased their focus on becoming more entrepreneurial, in part because of the appeal of the Millennial generation that is estimated to make up 46% of the workforce by 2020. Over the past several years companies have accelerated partnerships with accelerators and launched their own programs. A sample of the leading activity is Humana (and now Aetna) sponsoring the Blueprint Health accelerator in 2012 to foster innovation in healthcare IT. Also examples of collaborative endeavors partnering with academia, entrepreneurs, and investors is Flagship Ventures to accelerate health technologies and therapeutics. The Samsung Accelerator launched in 2013 to attract entrepreneurial talent and innovate specifically for Samsung. From 2015 through the present, Disney, Barclays, Sprint, Virgin Media, and others all partnering individually with leading accelerator Techstars to lead accelerator programs designed for each company.
Additionally, corporate venture capital plays a leading role, representing 17% of all venture capital investments in 2015. Corporate venture capital has also increased in 55% from 2012 to 2014 by number of deals and increased in funding 76% year over year. In 2014 corporate venture firms deals added up to 656 investments totaling more than $12B. Google Ventures was so active it was identified as the largest corporate venture firm and 6 most active among venture capitalists in North America. Overseas Intel Capital and Qualcomm Ventures are the leading corporate venture investors.
Government and regulations
Countries around the globe doing more to stimulate start-up activity. Examples include the Start-Up Chile program, an incubator in Santiago, Chile launched in 2010, with a goal of making at making Santiago the next ‘Silicon Valley’ and the Start-up Brazil launched in 2012.
Related to the U.S. and its commonwealth regions. Most recently the Parallel 18, an incubator program launched in Puerto Rico, is aimed at stimulating economic activity in the region. Also, in 2014 President Obama stated that he will support efforts to make it easier for foreign entrepreneurs to obtain visas for the U.S. Around this time, the Optional Practical Training (OPT) program were recent graduates can stay in the country for 12–29 months, was expanded to include 400 different fields of study. While the ‘start-up bill’ failed to pass, increased attention has been placed around this issue as the H1-B, E-2, and L-1 visa options have not been adequate fits for all start-ups.
Another program started in 2013 under the Obama administration is the Presidential Innovation Fellows (PIF). The program is a 12-month fellowship program where individuals from the likes of Google and other Silicon Valley talent bring their technical skills, values, and practices to lead innovation projects within the government and instill a culture of entrepreneurialism.
The most significant piece of legislation affecting companies and fundraising has been the JOBS Act. Although the act passed in 2012, the major components of the act, Title II and Title III did not take effect until late 2015 and early of 2016 respectively. Title II allows small businesses to advertise and solicit private investment opportunities under a new exemption called Rule 506(c) of Regulation D. This now provides smaller businesses the opportunity to advertise and crowdfund investments directly with investors without going through expensive and resource intensive investment banks like Goldman Sachs. While only 900 companies raised $10B in new capital through the exception, compared to 18,000 companies raising $900B through the standard process, the exception opens the door for smaller companies to obtain the capital they need to scale more easily.
Title III allows equity crowdfunding from non-accredited investors for the first time. Companies with under $25 million in assets can raise up to $1M over a 12-month period. Individuals making less than $100K annually can invest up to $2K or 5% of their income, whichever is greater. Those earning more than $100K a year can invest up to 10% of their income. Title III is expected to go into effect in May of 2016. The introduction of Title II and Title III is expected to improve transparency in the private fundraising marketplace for business.
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