Rockin’ Across Regions: Analyzing International Deal Flow from Industry Reports, Y Combinator, and Stonks Demo Days
Due to the seemingly inevitable march of globalization, our world is more interconnected today than it ever was before. Ironically, despite this growing overlap, inter-regional correlation rarely follows. That is, startup and venture capital conditions in one market seldom (if ever) correlate directly to the conditions in another. A wide variety of factors — whether currencies, climates, commerce, or disparate socioeconomic conditions — generate a myriad of diverse environments for local startups and investors.
Given this wide spectrum, where should investors and startups lean in?
In this post, Stonks’ resident Data Whiz Kai Graham helps us parse through things to understand why.
Different Regions, Drastic Out/Underperformance
Per KPMG’s Q2'22 Venture Pulse Report, startup outcomes vary tremendously across regions:
In Q2’22, there were 97 new unicorns birthed globally, with fintech companies representing more than a third. The Americas accounted for over half of the world’s new unicorns, with the US hosting all but three in Latin America (Unico and Stark Bank in Brazil and Kushki in Ecuador). Europe saw 18 new unicorns come from 8 different countries (UK, Germany, Finland, Sweden, Norway, Netherlands, Switzerland, Israel), reflecting the incredible geographic diversity of the European VC market. Asia also saw quite a geographic spread of new unicorns, with 17 coming from seven jurisdictions in Q2’22.
Recent reports from the Wall Street Journal echo this insight. Relative performance differs drastically across regions:
European venture-capital investment lost less ground than the U.S. and Asia in the second quarter as deals everywhere took a nose dive in the wake of surging inflation, higher interest rates and macroeconomic uncertainty…Funding for European startups dropped by 13% in the second quarter from the first three months of the year, compared with a 25% quarter-to-quarter drop in both the US and Asia.
Finally, comparing deal activity from different regions on Pitchbook, we can better discern disparate geographic-based outcomes:
Pitchbook’s immense global dataset offers a few clear insights:
- Comparing the three regions (US, Americas, Europe, and Asia), recent growth differences in Asia stand out, with Q2 showing larger relative drops than others.
- Further regional differences can be seen over time when looking more closely at the relationships of deal count by stage. For example, Angel and Seed deal flow in Europe is much more in-line with Early VC levels, but much larger differences exist in both the US and Asia.
- Opportunists willing to expand to international markets can take advantage of local discrepancies and are likely to outperform significantly.
Local market conditions will undoubtedly continue to fluctuate. By targeting markets with sizable momentum at a given funding stage or within a particular vertical, both startups and their investors can gain a true edge.
For example, TechCrunch recently analyzed African startup valuation trends and found more robust tailwinds out of Kenya than any other country on the continent:
Kenyan startups raised nearly one billion dollars in the first half of 2022, surpassing what the country secured last year. Data shows that, of the big four in Africa — the quartet that includes Nigeria, Egypt and South Africa, and which receives most VC funding in the continent — Kenya has so far showed the greatest growth in funding gained this year.
In light of such trends, it would behoove investors and partners to continue to hone in and target these booming locations.
What’s YC Got to Do with It?
Unpacking YC cohort data offers another clear example of investors’ shifting focus.
Take a look at their cohorts’ respective makeup over the past few years:
With bar width representing cohort size, we see two clear trends emerge:
- Over time, cohort sizes have grown materially. That said, YC’s summer 2022 cohort will only include 250 startups — marking a severe departure from the rapid growth seen over the past few years.
- Looking at cohort mix over time, we see a clear change in focus. International startups make up ~50% of all participating YC companies. This marks a significant increase from the ~15% seen just six years ago.
Despite this summer’s smaller cohort, YC continues to maintain a macroscopic focus on international startups.
Unpacking this data further, we can divine the types of businesses YC targets in respective regions. Using natural language processing, we can plot the most common company descriptors from each region:
Parsing through the top ten most common words in each region’s startup descriptions shows clear differences:
- Both North America and Asia often have “AI” appear as a common descriptor, whereas it does not show up in the top ten for either Africa, Latin America, Europe, or the Middle East
- The majority of common descriptors among Latin American startups relate to payments, banking, and marketplaces.
- Europe and the US see the most prominent descriptors related to Data & Applications.
While only a preliminary high-level analysis, the above provides a directional sense of where investors and startups are investing spending their time and investing their capital. Given the patterns emerging across different regions, YC continues to strike where the iron — and industry/vertical tailwinds — is hot globally.
This behavior makes perfect sense in light of the disparate under / outperformance across geographies, industries, verticals, and markets.
International opportunities remain vast for those brave few willing to expand beyond local borders and limited markets. Put simply, it’s what the “Smart Money” is doing. Data shows that larger market participants such as QED have shifted their focus more on markets outside the US in recent years.
Given this international opportunity, deal flow and demand from the world remain incredibly robust on Stonks.
Globetrotting with Stonks
It’s said that capital is limited while opportunity is not.
Given the firehouse of international deal flow across regions and industries, how can investors allocate capital to these fast-growing startups?
Though we’re biased, Stonks is a great place to start.
Below highlights the breakdown of Stonks startup pitches since January of this year:
As can be seen, startups located outside of the United States have represented close to 40% of all pitching companies at minimum. This diversity of deals allows investors to fund companies far and wide in order to increase the odds of outperformance.
Investors Don’t Have All the Fun: Introductions and Partnerships on Stonks
Investors aren’t the only ones who can benefit from the eclectic mix of opportunities available on Stonks. Startups and partners eager to tap new sources of capital or customers can readily benefit from our active, global investor base.
Looking at the average number of introduction requests and investment interest generated by startups on Stonks, we see strong performance across all regions:
Interestingly, median introductions and investments across regions show strong growth and little fluctuation around the globe. Looking at median introduction requests and investment interest per startup, segmented by region, we see the following:
- Africa: Four introduction requests|$210K of investment interest
- Asia: Five introduction requests| $330K of investment interest
- Australia/New Zealand: 5.5 introduction requests | $755K of investment interest
- Europe: 4 introduction requests | $268.5K of investment interest
- Latin America: 13 introduction requests | $1.29M of investment interest
- USA/Canada: 5 introduction requests | $587.5K of investment interest
Despite standouts from regions like Australia/New Zealand, Latin America, and the US/Canada, we see strong performance from startups located all around the globe.
Now more than ever, exposure and allocation to countercyclical assets like early-stage startup equities allow for proper diversification and potential outperformance.
Put simply, Stonks makes it easier than ever to explore, connect with, and invest in the very best global startup deals. Startups, partners, and investors of all kinds can benefit from our quality deal flow and unique approach to Venture Capital. Whether via demo days or fee/carry-free funds, we have you covered.
Come along for the ride — we hope to see you on the moon. 🚀