Indexing the 2018 Series Bs

Earlier this week, Peter Walker published a distribution of MOICs for all 547 Series Bs in 2018 on the Carta platform, showing how Figma’s 100x Series B in the same year stacked up relative to the whole ecosystem.

Figure 1. Distribution of 2018 MOICs per Carta data

It should not be news that there is a power law at Series Bs. But this chart appears to be a Rorschach test as to VCs’ investment style and how they consider the ecosystem. The debate on 20VC is worth watching on this topic, clipped here.

Jason Lemkin argues that this data shows how hard picking is (67% of rounds return <2x even at Series B), while Rory O’Driscoll argues that delivering on this distribution would lead to a 3x net return for LPs (or 3.7x gross).

This Carta chart speaks to a broader debate about concentration versus diversification (pejoratively labelled as “spray and pray”).

At SignalRank, we see this chart as supporting the notion that indexing Series Bs can deliver compelling returns, if you were to invest in all 547 companies. The big assumption here is that you can access the 10x+ companies as easily as the duds.

Our strategy is to aim for the top 5% of all Series Bs. How would indexing the top 5% of all Series Bs compare to this 3.0x return?

In order to answer this question, we first considered the Crunchbase data set (1,263 Series Bs in 2018 globally, ex China) which is larger than Carta’s (547 Series Bs). By applying our model, we reduce the number of potentially qualifying Series Bs to 82 (roughly 6% of all Series Bs).

Figure 2 shows the distribution of these three datasets for 2018 Series Bs. The Crunchbase dataset shows slightly worse performance than the Carta dataset.

By eliminating the bottom 95% of Series Bs on our model, our methodology reduces 2x or lower outcomes to 40% (compared to ~65% to the other datasets), while boosting power law returns to 14%.

Figure 2. MOICs from 2018 Series Bs: comparing Carta, Crunchbase & SignalRank

What if you were to index these Series Bs?

On our math, the gross return would 3.2x if you were to equal weight invest across all 1,263 Series Bs (and if you assume <=1x MOICs are zeroes).

If you were to equal weight an investment into every SignalRank Series B (and assume <=1x are zeroes), the overall MOIC would be 6.0x.

If you could truly index the top 5% of Series Bs, the math suggests you’d outperform most concentrated VC portfolios. That’s what we’re building at SignalRank.