Forecasting a Return to Venture Normalcy

The prospects of every startup change monthly. However, one observed phenomena of early-stage investing is that startups doing well are more likely to give you updates—and startups doing poorly are less likely to give you updates.

This means a month with low activity (i.e., changes in price per share because of financings or exits) but many positive updates, and a month with high activity but fewer positive updates might reflect the same underlying state of startup health. In the former case, we just didn’t hear about the negative activity.

As a practical matter, this means as we observe more activity, we should expect that activity to be less good: we should expect a negative relationship between venture activity and the tenor of that activity. As such, if you plot venture activity (X-axis) against the percent of activity that you observed that is positive (Y-axis), you should expect a band running from upper left to bottom right (northwest-to-southeast).

Up until the pandemic, that’s exactly what we saw at AngelList, with tenor and activity generally running along a northwest-to-southeast band:

Each dot represents trailing three-month activity (financings and exits) and markup rate (of the financings and exits that were completed, the percent done at a price per share increase) for startups on AngelList, measured monthly.

We’ll annotate this a bit to draw out three things worth mentioning:

Each dot represents trailing three-month activity (financings and exits) and markup rate (of the financings and exits that were completed, the percent done at a price per share increase) for startups on AngelList, measured monthly.

• The “Normal” Line: This is a line we drew suggesting typical venture activity, based on historical performance of startups on AngelList. Deviations above and below this line (i.e., Southwest = “bad,” Northeast = “good”) can be statistically interesting.
• 2016 Panic: Yes, this happened. Here are some articles about it.
• 2019 Peak: Venture ended the decade on something of a hot streak, which made the pandemic decline more extreme.

Enter the Pandemic

Let’s look at the same plot of what’s happened to early-stage venture since the pandemic (pre-pandemic data is retained, faintly visible, along with the “Normal” line).

Prior to the pandemic, monthly performance generally moved along the “Normal” line. But during the pandemic, we saw four distinct directional moves:

• Southwest (”2Q20 Trough”): A massive drop in both activity and tenor in the second quarter of 2020, during the start of the pandemic.
• North (”Recovery”): Tenor reaches near-record levels of positivity, but with record low activity rates.
• East (”Boom”): Tenor sets record levels of positivity alongside near-record rates of activity.
• Southwest again (”Pullback”): Most recently, we’ve seen a drop in both tenor and activity.

None of this activity moved along the “Normal” line. Put another way: none of what we’ve seen since the start of 2020 has been “normal,” in a historical sense.

Where We’re at Today

Venture activity and markups have crept back towards the “normal” line, suggesting a potential return to pre-pandemic levels of activity and tenor. Whether performance continues to fall (i.e., moves southwest) or flattens remains to be seen.

Note that, if we’re using the “Normal” line as a reference, then even venture performance during this “Pullback” period would be considered very positive by historical standards. The fact that it's seen as a downturn is a reflection of the bull run early-stage venture has been on the past 18 months.

As such, it wouldn’t be unexpected to see venture continue to pull back in both tenor and activity in the short-to-medium term.