A new index aims to help consumer-oriented startup founders understand the health of the venture capital fundraising environment; specifically, when is a good time to seek funding — and when isn’t.
How does it work? Created by the early-stage venture firm Goodwater Capital, the index starts by analyzing a trove of publicly available information, from the aggregate dollars raised by U.S.-based consumer tech startups during the current month, to related monthly M&A activity, to the amount of money VCs have raised in the previous year, to the amount of money they’ve invested in startups over the previous quarter. It also factors in the median price-to-earnings ratio of top public U.S. consumer tech companies during the current month.
Not each is weighted equally, says the firm’s lead data scientist, Jimmy Li. Instead, the firm factored in historical sentiment over the last 20 years, creating a regression analysis using those five buckets to understand which variables matter the most over time. “It’s no one thing,” says Li. “In fact, the thing that most people see — deal volume — is a lagging indicator, not a leading indicator.”
Goodwater was founded in 2014 by Eric Kim, a former investor with Maverick Capital, who launched the consumer-tech focused firm with his former Stanford MBA classmate — and former Accel Partners and Kleiner Perkins Caufield & Byers investor — Chi-Hua Chien in 2014.
The firm has been working to differentiate itself through a series of tools that outsiders might find useful, including, last month, by publishing a detailed equity report about Snap prior to its IPO.
As for what motivated the firm to create this index, Chien says he sees the lack of transparency into private market investor sentiment as a “core market problem” that the firm was capable of addressing, with Li’s help.
“When it comes to the public market,” says Chien, “you can pull up any index, and at a glance, know how investors are feeling in a particular geography or about a particular industry. If market caps are rising, they’re bullish; if they’re falling, they’re bearish.”
It’s not nearly so easy in the comparatively opaque world of startups, where VCs are largely relying on data points within their own portfolios, and founders are dependent on the funding announcements they see, along with the anecdotes they hear at networking events.
Maybe Goodwater’s index can help change that, giving VCs and founders a better pulse on the wider world around them. Certainly, it’s a fun tool to play around with, as we discovered for ourselves yesterday. You can check it out for yourself here. Note that Goodwater will be updating the index monthly.