The Sentiment Index – Solving Early Stage Information Asymmetry

Information asymmetry reigns in the early stage market and has since venture capital came into being, with each group holding an informational edge over the people in the layer beneath. Investors have a negotiating advantage over founders since they have better insight into deal terms and trends in the broader market. Similarly, companies have the upper hand with potential employees because the latter tends to lack insight into the way a company’s cap table and preference stack are configured and don’t always have perfect information about salary and compensation packages for their peer group.

That’s not say there isn’t anything being done to level the playing field. Brad Feld’s “Venture Deals”, for example, is an invaluable resource for people that are unfamiliar with how early stage deals unfold. In his review of the book, Upfront’s Mark Suster notes the information asymmetry in the market and calls for an end to it.

There are numerous other examples of openness prevailing in an effort to use transparency to build stronger venture communities and better businesses. Salary and equity ranges on Angellist job postings. Baremetrics’ Open Startups initiative. The proliferation of VC blogging in general. All of these help push the players in he market towards information equality.

The Sentiment Index

Part of the reason Visible exists is because of a belief in the importance of transparency and stakeholder engagement in early stage businesses. Earlier this year, we launched The Sentiment Index, a survey and report focused on understanding how investors view present and future early stage market conditions based on factors like growth trajectory of companies and regional competitiveness.

When we announced the project, we noted the importance that entrepreneurs and operators place on the opinions of investors. This is something that certainly hasn’t changed and likely won’t any time in the near future. Over time, we hope that the insight we gather and distribute will help startup companies make more informed choices around when, where and how to raise money and understand what types of strategic decisions will need to be made based on changes in the market.

The Key Takeaways from Q1

Globally, investors shared an optimistic outlook on the market in both the near and long terms. Funding was perceived as readily available for companies (92 global index score) and investors are impressed with the quality of companies they are seeing ( 85 index score).

While the rest of the venture universe expressed confidence in the current state of the market, the Bay Area contingent was less upbeat. All of the investors surveyed from San Francisco and Silicon Valley responded either neutrally or negatively to the question of whether, compared to a year ago, it is a better or worse time to be investing.  

Downbeat projections among Bay Area and East Coast investors were countered with optimism in other geographies as Near Term Expectations came out slightly on the positive side. Citing intense competition and the ever-present concern of inflated valuations (at least relative to performance), many investors noted a potential change in approach in the near term, advising conservative burn management for companies while reassessing their own risk appetites.

When asked about accelerators, Midwest and European investors stayed true to enthusiastic form while investors from other regions, especially the Bay Area, seem less impressed with the graduates and more concerned about whether those companies, due to the competitive landscape among other factors, will be able to generate the traction necessary acquire follow on funding to continue operations.

In addition to the basic survey format, we solicited more open form responses to give investors the opportunity to to detail their market observations, vent frustrations, or offer feedback to entrepreneurs and fellow investors.

What’s New for Q2?

After releasing our first report in March, we received a lot of great feedback from investors and entrepreneurs, driving us to think about what we could to to make our analysis as informative as possible for everyone involved in the startup ecosystem.

To add depth to the analysis and provide insight from the other side of the table, we have partnered with Hyde Park Angels, one of the largest and most active angel groups in the midwest, to administer the survey and develop the final report.

How Can You Get Involved?

Investors, if you are actively engaged in the Seed or Series A (1+ investment in the last 12 months), we would love to have you take the survey. All of your answers are aggregated and anonymized and the survey takes about 5 minutes to complete.