Introducing the Capital Concentration Index™

A measure of startup competition.

The answer is simple — we measure the distribution of capital in the sector.

Inspired by the Herfindahl-Hirschman Index, the Capital Concentration Index™ (CCI) measures the degree to which venture capital dollars are consolidated among competing startups in a sector. It helps us understand how attractive a sector is for entrepreneurs and VCs, and allows us to evaluate how an individual startup’s latest financing event influences their sector’s competitiveness. Not only that, but it ended up being an informative metric for Startup Anomaly Detection™, our state of the art machine learning algorithm which estimates the probability that a startup will exit via an initial public offering or acquisition.

Some simple math

The Capital Concentration Index™ is calculated by taking the sum of the squares of the capital shares for all startups within a sector.

  • 1500-2500 — Lightly Concentrated: One or more startups have a mild competitive advantage in terms of capital.
  • 2500-5,000 — Moderately Concentrated: One or more startups have a moderate competitive advantage in terms of capital.
  • 5000-7,500 — Highly Concentrated: One or more startups have a significant competitive advantage in terms of capital.
  • 7500-10,000 — Clear Leader(s): One or more startups dominate the sector in terms of capital.

Some examples

Consider U.S. Influencer Marketplaces, where companies operate two-sided marketplaces that enable brands to connect with influencers for social media marketing purposes. In this space, we’ve identified 12 startups with $91.4m in aggregate capital invested. The top five best-capitalized startups are TapInfluence ($23m), rewardStyle ($15m), Mavrck ($8.1m), Reelio (8.1m), and Influential ($7.5m).

(Left) Funding dynamics for the five best capitalized startups in the sector. (Right) Three year trailing CCI and aggregate capital invested in the sector. Analyzing both charts helps us trace how financing events on the left plot impact the rolling capital concentration levels on the right plot.
(Left) Funding dynamics for the five best capitalized startups in the sector. (Right) Three year trailing CCI and aggregate capital invested in the sector. Using both plots helps us evaluate how absolute value financing events on the left plot impact the rolling capital concentration levels on the right plot.

Looking backwards to see forward

Like any good data science effort, the Capital Concentration Index™ leaves us with more questions than answers. Could the CCI help us further understand the evolution of capital in industries now dominated by household names? Earlier this year we mapped out the CCI for social networks (Facebook), search engines (Google), e-commerce retailers (Amazon), and ride-sharing services (Uber). Including capital injected via IPOs produces the dynamics shown below.

Three year trailing CCI for social networks (Facebook), search engines (Google), e-commerce retailers (Amazon), and ride sharing services (Uber).

Additional Perspectives

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