NYT declares tech “humbled” but overreaches on underlying data

A recent New York Times article points to high-profile stumbles by tech startups, particularly underwhelming IPOs by billion-dollar companies and thousands of people laid-off, and declares “start-up bloom deflates, tech is humbled.” As SSTI expressed concern about in the past, the trends of equity capital being invested at later stages, companies remaining private for longer, and (relatedly) valuations inflating beyond reason, have clearly set up the broader venture capital market for high-profile failures.

What really caught our eye in the article was the Times reporting a dramatic drop in the number of deals in the last quarter of 2019 and their contention that this represented a significant slowdown. The key to evaluating the impact of the trends, of course, is to look at the data, and this is where the Times article misses the mark.

The article uses investment data from PitchBook and the National Venture Capital Association to show that the number of deals in the 4th quarter of 2019 was the lowest of any quarter since 2016. There are several issues with the Times report:

• First, there is the perennial data issue — as SSTI regularly disclaims in our “Useful Stats” articles about investments — that identification of VC deals can lag by months, making recent data difficult to compare to historical trends. At this point last year, PitchBook was reporting that the 4th quarter of 2018 had seen the lowest level of activity since 2012. After identifying more than 600 deals in the quarter, it ranks as a more modest 11th out of the past 40 quarters.
• Second, before pointing to 4th quarter data as a sign of a weakening market, one should check seasonal investment patterns. The last quarter of the year sees the fewest number of deals on average. In the last five years, 2018 was the only year with a 4th quarter that was not the weakest.
• Third, investments in any given quarter do not happen in a vacuum. Given that the first half of 2019 set a record for deal volume, including two of the three most active quarters in the past decade, a 4th quarter slowdown was to be expected. Taken as a whole, and even given the data issues noted above, 2019 still saw the second most deals in the last decade (2015 was first), and the second greatest dollar value of those deals (2018 was first).

This is not to say that the VC market is on completely solid footing. In addition to the legitimate issues raised by the Times, we would add the rise of China’s domestic investment activity, paired with tougher U.S. regulation of foreign investment — not to mention general business uncertainty resulting from COVID-19. Given all of these factors, 1st quarter of 2020 could see weak investment numbers. As the first quarter is typically the strongest of the year, such an outcome would certainly compel scrutiny.