The Challenges of Accurate VC Investment Data

Reports proclaiming increases or decreases in seed round funding, or shifts in VC investment patterns, are commonplace. These trends significantly influence the strategies and planning of both startup founders and investors. Adjustments to hiring, runway extension, or increased investment in product development often stem from these perceived market shifts.

However, it’s crucial to recognize that the aggregated data concerning VC rounds is often fundamentally flawed. A comprehensive and reliable dataset on VC investments, particularly within the United States, simply doesn’t exist, and the quality of available data has been steadily declining, especially at the seed stage.

The Diminishing Role of SEC Form D Filings

The foundation of most VC investment trend data relies on SEC Form D filings. Unfortunately, these filings have become increasingly scarce over recent years. This issue isn’t due to a change in regulations, but rather a shift in the legal culture surrounding these filings.

A transformation has occurred, moving away from a practice of “always file” to one of actively avoiding filings whenever possible. Founders and investors are motivated to maintain the confidentiality of their startups, shielding financial details from competitors. Avoiding public disclosure also reduces unwanted attention from sales teams targeting companies with available capital.

Legal Interpretations and Silicon Valley Practices

Legal professionals, when discussing Form D filings, often emphasize the necessity of compliance. However, off the record, they reveal a willingness to navigate the boundaries of SEC securities regulations. The perception is that non-compliance rarely results in enforcement actions or penalties.

A common scenario involves attorneys advising founders that most of their peers choose not to file securities paperwork. Consequently, adhering to the law could place a company at a competitive disadvantage, leading the majority of founders to follow suit.

The interpretation of the law, and the sociological factors influencing attorneys, are more significant than the written regulations themselves. There's a spectrum in legal practice, ranging from strict adherence to more flexible interpretations, without necessarily violating the law.

The Rise of Alternative Investment Models

Beyond the changing legal landscape, the increasing complexity of investment rounds presents another challenge. Alternative investment models, such as rolling rounds, convertible notes, and SaaS securitization products, are becoming increasingly prevalent, particularly at the seed stage.

These new mechanisms often lack established legal precedents, leading attorneys to err on the side of caution and potentially skip filings due to the ambiguity surrounding regulatory requirements. This trend further contributes to the incompleteness of available data.

State Filings and Data Visibility

Startups can also circumvent federal Form D filings by submitting paperwork in the relevant state jurisdictions of both the company and its investors. While securities law is often associated with the federal SEC, a significant portion is still governed at the state level.

These state filings, however, remain largely invisible to industry analysts, as few datasets incorporate information from all 50 state securities databases. The accessibility and comprehensiveness of these state databases vary considerably, with some, like Florida’s, being particularly difficult to navigate.

Illustrative Examples of Filing Discrepancies

Consider Hebbia, a company that raised a $1.1 million pre-seed round. A search of the SEC database reveals no Form D filing. However, a search of the California DFPI database uncovers three filings totaling $1.2 million. This illustrates how crucial state filings are to obtaining a complete picture.

Even established companies like DoorDash largely avoid Form D filings. A search of the SEC database for DoorDash Inc. yields no results for its 11 venture rounds. The first SEC filings appear only in connection with its IPO preparations in 2020. Again, California’s database reveals filings dating back to 2016.

Compensating for Data Gaps

Using state filings is a standard business practice, but most industry datasets rely solely on federal Form D filings. Analysts attempt to compensate for these data gaps by incorporating publicly reported information from sources like TechCrunch, social media, and self-reported data from startups.

They also conduct surveys of lawyers and accountants to statistically estimate the number of rounds conducted, given the limited information available. However, the accuracy of this approach remains unmeasurable, as there’s no independent dataset for comparison.

Estimating the Extent of Undisclosed Rounds

Determining the percentage of undisclosed rounds is inherently difficult. However, a reasonable estimate suggests that around 50%-60% of seed rounds, a third of Series A/B rounds, and a decreasing percentage of later-stage rounds go unreported. As companies mature, Form D filings become more beneficial for mitigating legal risk and managing securities paperwork.

Even government agencies lack access to comprehensive data. A recent Wall Street Journal article highlighted the Department of Justice’s investigation into startups funded by Chinese investors. The DOJ doesn’t rely on a secret database; they face the same data limitations as everyone else.

The Value and Limitations of VC Investment Trend Data

Despite these challenges, VC investment trend data remains valuable market intelligence. While directionally accurate at a high level, it’s essential to acknowledge the significant constraints on comprehensive and accurate analysis. If startups aren’t legally obligated to disclose their investor data, there’s simply no alternative source for this information.