{"id":129936,"date":"2010-01-02T13:14:47","date_gmt":"2010-01-02T18:14:47","guid":{"rendered":"http:\/\/www.feld.com\/wp\/archives\/2010\/01\/you-dont-mean-average-you-mean-median.html"},"modified":"2010-01-02T13:14:47","modified_gmt":"2010-01-02T18:14:47","slug":"you-don%e2%80%99t-mean-average-you-mean-median","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/129936","title":{"rendered":"You Don\u2019t Mean Average, You Mean Median"},"content":{"rendered":"
<\/a><\/div>\n

Every quarter, without fail, a bunch of articles appear talking about the venture capital industries investment pace as a result of the PWC MoneyTree report<\/a>.\u00a0 I used to get calls from all of the Denver \/ Boulder area reporters about my thoughts on these \u2013 that eventually stopped when I started responding \u201cwho gives a fuck?\u201d<\/a><\/p>\n

A few days ago I got a note from Steve Murchie about his new blog titled Angels and Pinheads<\/a><\/em>.\u00a0 I\u2019m glad Steve is blogging about this as he\u2019s got plenty of experience and thoughts around the dynamics of angel investors \u2013 some that I agree with and some that I don\u2019t.\u00a0 Regardless, my view is that there more there is out there, the better, as long as people engage in the conversation.<\/p>\n

In his post Mind the Gap<\/a><\/em> he made an assertion that \u201cthe VC industry has effectively stopped investing in seed stage ($500K and less) and startup-stage ($2M and less) opportunities.\u201d\u00a0 As a VC who makes lots of investments between $250k and $2M, and who has plenty of good friends who happen to be VCs that also make investments in this range (such as Union Square Ventures, First Round Capital, True Ventures, SoftTech VC, FB Founders, Alsop Louis, O\u2019Reilly Alpha Tech, and Highway 12), I thought Steve\u2019s assertion was wrong and I told him so in the comments.\u00a0 He countered with the PWC Moneytree data on Q3 VC investments<\/a>.<\/p>\n\n\n\n\n\n\n\n
Stage<\/strong><\/em><\/td>\nTotal $M<\/strong><\/em><\/td>\n% of Total<\/strong><\/em><\/td>\n# Deals<\/strong><\/em><\/td>\nAvg \/ Deal $M<\/strong><\/em><\/td>\n<\/tr>\n
Later Stage<\/td>\n1611<\/td>\n33.49<\/td>\n168<\/td>\n9.6<\/td>\n<\/tr>\n
Expansion<\/td>\n1610<\/td>\n33.48<\/td>\n185<\/td>\n8.7<\/td>\n<\/tr>\n
Early Stage<\/td>\n1081<\/td>\n22.49<\/td>\n198<\/td>\n5.5<\/td>\n<\/tr>\n
Startup\/Seed<\/td>\n507<\/td>\n10.54<\/td>\n86<\/td>\n5.9<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Steve\u2019s response to the Startup\/Seed \u201cAverage Deal Size\u201d was \u201cWTF??!\u201d\u00a0 While that is the correct reaction, his conclusion (that VCs aren\u2019t investing between $250k and $2M) is incorrect for two simple reasons: (1) the data is the PWC MoneyTree Report<\/a> is incorrect and incomplete and (2) the interesting number to look at, assuming the data is correct, is the Median<\/a>, not the Average.\u00a0 If you wonder why, Wikipedia\u2019s explanation is pretty good: \u201cThe median can be used as a measure of <\/em>location<\/em><\/a> when a distribution is <\/em>skewed<\/em><\/a>, when end values are not known, or when one requires reduced importance to be attached to <\/em>outliers<\/em><\/a>, e.g. because they may be measurement errors<\/em>.\u201d<\/p>\n

Let\u2019s look at the underlying data in Silicon Valley (that results in the above table) to understand this better.\u00a0 Going to the PWC Moneytree Startup\/Seed investments in Silicon Valley for Q309<\/a>, you get the following:<\/p>\n

\"image\"<\/a><\/p>\n

The first six \u201cstartup\/seed\u201d investments each raised $10M or more.\u00a0 Now, I\u2019ll accept that these might be classified as \u201cstartup rounds\u201d (e.g. the first round of investment) but no rational person would categories these as seed investments.\u00a0 But, for purposes of this example, let\u2019s keep them in the mix.\u00a0 The average is $6.4M and the median is $5.0M.\u00a0 Now, let\u2019s toss out only <\/em>the ones $10M or great since these clearly aren\u2019t \u201cseed\u201d investments.\u00a0 Our average is now $3.4M and the median is now $2.0M.<\/p>\n

I\u2019m still feeling generous (e.g. I\u2019ll waive reason #1 \u2013 that the data is incorrect \/ incomplete – for the time being).\u00a0 Let\u2019s look at the PWC Moneytree Startup\/Seed investments in New England\u00a0 for Q309<\/a>.<\/p>\n

\"image\"<\/a><\/p>\n

The average is $8.4M and the median is $5M.\u00a0 Now, toss out everything above $10M.\u00a0 The average is now $3.9M and the median is $4M.<\/p>\n

But it gets better.\u00a0 Let\u2019s take all of the PCW Moneytree Startup\/Seed Investments in the US for Q309<\/a>.\u00a0 There are 86 of them and as we know from the first table the average is $5.9M.\u00a0 But the median is $4M.\u00a0 Now, toss out the ones above $10M.\u00a0 The average is now $4M and the median is now $3M.\u00a0 This exercise \u2013 again \u2013 assuming the data is correct<\/em> \u2013 shows the difference between average and median, as well as how much the numbers are skewed upward by \u201cstartup\/seed\u201d investments $10m or more.<\/p>\n

I\u2019m not going to try very hard to show that that the data is incorrect, but I\u2019ll give you two examples.\u00a0 The first is FourSquare<\/a>, a well known seed investment led by Union Square Ventures and O\u2019Reilly AlphaTech.\u00a0 It was a $1.35M financing, has three employees, and occurred in 9\/09.\u00a0 This is about as close to the definition of a seed investment as you can get.\u00a0 Yet, PWC Classifies it as Early Stage<\/a> (plus they got the investment amount wrong as they list it as $1.15M.)\u00a0 For reference, Dow Jones VentureSource classifies this as a seed investment and <\/em>gets the amount right.<\/p>\n

Let\u2019s do another one.\u00a0 This time look at what PWC MoneyTree has on First Round Capital<\/a><\/p>\n

\"image\"<\/a><\/p>\n

compared to what Crunchbase has on First Round Capital<\/a> for Q309.<\/p>\n

\"image\"<\/a><\/p>\n

The differences that I think are incorrect on PWC\u2019s part are that (1) GumGum is missing, (2) CoTweet is classified as Early Stage instead of Seed, (3) BigDeal is missing, (4) DNAnexus is missing (although it looks like it might have happened in Q2 even though it was widely reported in August), (5) Continuity Engine is classified as Early Stage instead of Seed, (6) ClickEquations is missing, (7) Sofa Labs shows up twice, and (8) Sofa Labs is classified as Early Stage instead of Seed.\u00a0 Now Crunchbase is missing Project Fair Bid (even though they reported on it) so they aren\u2019t perfect, but at the minimum the misclassification between Seed and Early Stage is dramatic.\u00a0 Just for grins I looked these up in Dow Jones VentureSource and their data is closer to CrunchBase\u2019s (especially the Round Type), but there are still differences.<\/p>\n

Ever since I started investing in 1994 I\u2019ve heard people spouting VC investment statistics to justify different viewpoints.\u00a0 I\u2019ve always felt this was a \u201cgarbage in \/ garbage out\u201d phenomenon.\u00a0 While there are some academics that do rigorous work around this (and understand the difference in importance between averages, medians, and er \u2013 statistically significant results), they are few and far between.\u00a0 And \u2013 most of the data people actually use and discuss is stuff like the PWC Moneytree Report.<\/p>\n

I keep fantasizing that this madness will stop, but I doubt it will.\u00a0 In the mean time, I think I\u2019ll go for an average run at a median pace.<\/p>\n

<\/img><\/a>
\n<\/img><\/a><\/p>\n

\n<\/img><\/a> <\/img><\/a>\n<\/div>\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

Every quarter, without fail, a bunch of articles appear talking about the venture capital industries investment pace as a result of the PWC MoneyTree report.\u00a0 I used to get calls from all of the Denver \/ Boulder area reporters about my thoughts on these \u2013 that eventually stopped when I started responding \u201cwho gives a […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-129936","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/129936","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=129936"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/129936\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=129936"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=129936"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=129936"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}