More thoughts on understanding what is market
It being the middle of June the numbers for Q2 are about to come out, with the inevitable result that many new blog posts will be added to the blogosphere providing all kinds of analysis. Our firm contributes to this quarterly cacophony with our EEC Perspectives publication which analyzes what is going on in New England. When we started this publication, we gave some thought to what we could/should publish and from what base sources. So, we look at the quarterly data that we derive from mining VentureSource and various searches of Delaware filings. We analyze the data ourselves and make judgments about its quality and significance and try to turn it into useable information. The way we think about the data is as follows:
We look at the gross number of deals that were done in New England by category in the period. So we look at Series A deals and then later stage deals. One thing to think about is the simple number of deals done in the period compared to the prior year period and the preceding period. One measure of robustness would be whether or not the number of deals is increasing.
But, simple numbers are not enough. For example, what if there are a lot of deals, but they are all down rounds. It turns out that we can determine this. If I am not mistaken, we are the only source that researches this fact and publishes objective data on it. What if there are a lot of Series B and later stage deals but relatively few Series A deals. At the risk of stating the obvious, increasing numbers of deals and rising valuations for later stage deals indicate strength in the market.
By the way, we also look at it by industry sector and by size of investment.
Some of these larger trends suggest what other data might be. By way of example, in a robust market (increasing numbers of deals and increasing valuations) you would expect certain terms, such as the number of deals with participating preferred stock, would decline. (A robust market, I think, implies greater bargaining power for entrepreneurs, hence more favorable deal terms.) For this reason, we also track and report on deal terms, such as how many deals have participation, how many have dividends etc.
One thing is that you need a very broad sample to be comfortable that you understand the market. We don’t look at every deal, or perhaps I should say we don’t report on every deal we look at. However, we have been doing this for 18 months and are now starting to feel that we have enough data and historical information to come to meaningful conclusions about where we are at the end of any given quarter.
Another thing is gut instinct and anecdotal evidence. To feel comfortable that you have your finger on the pulse, all these inputs should be pointing in the same direction. Right now, my sense is that the market is confused. Anecdotal evidence suggests that there are still a lot of down rounds and low valuations but the same instinct says that there are a lot of new Series A deals – which suggests increased activity. I am looking forward to the end of June to take a good look at the numbers. Separately, if you want to be on the email list for EEC Perspectives, send me an email and we will add you to our distribution.