Our homepage metrics and methodology
95 businesses created around the world every minute. 27.3 average annual return on an angel investments. $5.17 Trillion in combined market cap of publicly traded tech companies.
We chose to highlight these three numbers in order to shine light on the opportunity around investing in startups, especially in those beyond Silicon Valley. We understand there’s likely to be lots of discussion and questions about these numbers, so we’re making our methodology available. We also want our readers and customers to be aware that there is a distinct lack of quality data around startups and startup investing, especially beyond the United States. Our hope is over the next couple years, measuring, reporting, and tracking will improve and allow us to go into greater depth and specificity. As is, we felt that the numbers on our homepage are the best metrics we can highlight and support with reliable, well-thought-out research. We welcome your comments and input, and hope you engage us in a discussion about how to best calculate these numbers, what other numbers we should consider highlighting, and how we can tell the story that is the global startup revolution.95 Businesses
One of the best resources for startup research is the Global Entrepreneurship Center, which maintains the annual ‘Global Entrepreneurship Monitor.’ They’ve calculated that there are about 50M businesses created worldwide each year, or 137,000 per day, which equals approximately 95 businesses every minute. Of course, not all of these are high growth tech startups. Our sense is that about 5% of these are actually tech related and appropriate for angel-investment, which is still a huge number. And as the rest of the world comes online and picks up engineering skills, it only stands to increase.Return on Investment:
We consulted dozens of studies that have examined this question: what is the return on investment for angel investors? The most thorough of these is GrowThink’s piece that assessed several different studies, and combined them to find an average annual return of 27.3% per year. You can and should read in depth about their methodology here.To be aware of:
- Average Annual Return (AAR): We’ve carefully discussed whether to show this number as average annual return, internal rate of return (IRR), compound annual growth rate (CAGR), or one of the many other acronyms used in financial calculations. In the name of simplicity and ease of understanding for the broadest audience, we chose AAR. If you disagree with this choice, please tell us why and let’s discuss.
- To approach this number, you need to diversify your startup portfolio: There is general consensus that one must make a certain number of investments in order to diversify your risk and begin to converge on some form of expected ‘annual return.’ Broadly speaking, this number is at least 20 investments. It’s the simple law of averages and harkens to the “indexing” concept prevalent in public market investing. The same is true with startups — spread your risk. Some investments will outright fail, some will make you your money back, and one or two will be breakout wins that carry the rest of your portfolio.
- Realizing your returns takes years: There is disagreement on the average time it takes to exit an investment. Some studies show 3 to 5 years; others suggest 7 to 9; still others suggest an average of 10 years or more. Of course, sometimes you’ll see startups snatched up in just a year or two, netting you a healthy return in a short amount of time. The jury is out. Suffice to say, it takes time to realize your returns, and as an investor you must exercise consistency and patience.
There are a number of interesting stories to tell around the massive value and wealth creation due to technology startups across the world. We wanted to help visualize the extent to which value is created from tech companies; it is mind blowing, and it is going to continue for decades to come. To do this, we chose the overall market cap of tech companies listed on the NYSE, Nasdaq, and AMEX exchanges. A simple number, but a powerful one. While there are also tech companies of note on other exchanges around the world, these three contain the vast majority of traded tech companies and make our calculations much simpler.
We arrived at $5.17T by summing the value of all 678 tech companies listed on the Nasdaq, NYSE, and AMEX exchanges. That being said, this number will fluctuate on a daily basis with the ebb and flow of the market. According to research performed by finance professor Jay Ritter, there were 2,907 tech-related IPOs (excluding biotech) out of a total 7,857 IPOs between 1980 and 2013. 58% of tech IPOs in this time period were VC-backed, which leads to 1,686 VC-backed tech IPOs. Professor Ritter classifies the remainder of tech IPOs as “buy-out backed”. The following paragraph is his reasoning on the difficulty in differentiating between the two categories:
“The financial backers of some companies are easy to classify, such as when Sequoia Capital and Kleiner Perkins invested in Google, or when KKR invested in Dollar General. But other situations involve growth capital investing, as when Warburg Pincus finances a company that rolls up some doctors’ offices. With just two categories (VC and buyout), there is some arbitrariness in the categorization of IPOs backed by growth capital investors. 308 growth capital-backed IPOs are classified as VC-backed.”