How much funding will U.S. tech startups raise in the second half of 2021?

Time Spent: ~4 hours

Or, more specifically: How much funding will U.S. tech startups raise between July 1 and December 31, 2021, inclusive? A “tech startup” is a company categorized as one or more of: software, hardware, internet services, or information technology; and, the company is in one of the following funding rounds: pre-seed, seed, angel, series a, series b, or venture round. For the purposes of the forecast, we’re using Crunchbase data.

The buckets and my credences:

• A: < $13bn (0%)
• B: [$13bn, $17bn] (15.5%)
• C: ($17bn, $21bn] (74%)
• D: ($21bn, $25bn] (8.5%)
• E: >$25bn (2%)

CSET provided a dataset from Crunchbase, which I copied (see table in footnote).¹

Generating the Outside View

To generate my outside view, I used two methods:

1. A simple linear extrapolation of the data gives a central estimate of $17.065 billion for 2021 H2.
   • Then, I check how often the residuals of the regression are large enough that, if applied to the central estimate, it would suggest each bucket.
   • Doing so suggests B: 11/20 = 55% and C: 9/20 = 45%.
2. Compute the lagged difference between period t and period t-2. Then, compute how often the lagged difference falls within the relevant ranges for each of the four buckets.
   • That is, how often is the change from one period to the next-next period large enough that, if applied to our most recent data (H2 2020), it would suggest each bucket.
   • Doing so suggests: A: 0%, B: 4/18 = 22%, C: 12/18 = 67%, D: 2/18 = 11%.

The simple average of those two gives: A: 0%, B: 38.5%, C: 56%, D: 6.5%, E: 0%.

(I don’t think these are the most statistically savvy or sound methods, but it’s the best I have for now!)

Updating for the Inside View

Given that the period t-1 saw growth, how often did t also see growth?

• 10/13 instances.

Startup funding appears extremely strong in the first quarter of 2021; early-stage funding (for all categories) was $19.7 billion compared with $14.5 billion in the fourth quarter of 2021.² Tech startups usually account for somewhere between one-half and two-thirds of that and follow similar trends. Simple linear extrapolation suggests total first-half early-stage funding of ~$39 billion, which suggests something like ~$20 billion to $26 billion (if the one-half to two-thirds ratio holds). I expect the true range to be lower and smaller, as this quarter was record-setting and some regression to the mean seems reasonable.

All this to say, I feel confident (~95%) that the first half of 2021 will show growth. Using the historical track record, the hypothesis that 2021 H2 will show growth is something like 10/3 times more likely given that I’ve seen this evidence.

Before seeing this evidence, my prior odds of growth were 62.5:37.5 (56% + 6.5%). Multiplying that by the likelihood ratio of 10/3, I arrive at posterior odds of 82.5:17.5 (82.5%).

I also update up a little more on the basis of the extremely strong market, giving E a 2% credence. I update C and D proportionally, arriving at a forecast of:

• A: < $13bn (0%)
• B: [$13bn, $17bn] (15.5%)
• C: ($17bn, $21bn] (74%)
• D: ($21bn, $25bn] (8.5%)
• E: >$25bn (2%)

If I Spent More Time

• Learn about better-suited statistical methods
• Learn why there were downturns in 2016 and 2019.
  • A very brief search suggests that VC capital dried up in 2016, and the Crunchbase article suggest that VC firms have plenty of capital at the moment, but this was a really quick glance (~5 min)