Don’t Overdose on VC: Lessons from 166 startup IPOs
By Micah Rosenbloom and Joseph Flaherty
Does raising a large amount of capital make a startup more likely to succeed? Is capital a weapon? Do startup founders need to “go big or go home?”
At Founder Collective our belief is that venture capital is a hell of a drug and a dangerous substance that merits a warning label. But rather than debate these positions abstractly we looked at a decade of tech IPOs stretching from January 1st, 2010 to December 31st, 2019 and found 166 companies. A data-driven analysis follows, but the TL;DR is that capital has historically been vastly overrated as a predictor of startup success.
For instance, compare the performance of the 30 most funded and the 30 most valuable startups in this data set. The most valuable companies raised half as much capital and produced nearly 4X the value! Capital is clearly important, and most startups need some funding to get started, but it’s not determinative.
You can view all the underlying data in this sheet, but we’ve also highlighted some key takeaways below.
1. Venture Capital is an extraordinary asset class
This cohort of startups has, in aggregate, created over four trillion dollars in value, nearly an 80X return on the capital invested. Entrepreneurship is an incomparable economic engine. Not only does tech create tremendous value, but it also does so quickly. The median company on this list was founded in 2005 and all were founded after the year 2000.
2. The last five years have been more extraordinary than usual
We looked at a five-year span of IPOs in October 2016 and the most valuable company at that time was also Facebook which had a market cap of $364B. The second most valuable company on the list was LinkedIn, then worth $26B. The 20th spot was held by FitBit with a market cap of $2.9B.
Today, approximately five years later, Facebook and Tesla regularly have market caps in excess of one trillion dollars. The 20th most valuable company in 2021 is worth roughly the same as the 2nd and 3rd largest companies in 2016 — combined. The 100th company on the 2021 list would have made the top 20 in 2016.
A lot has changed in the last five years. Who knows what the next five hold?
3. You need less than you think to get public
There’s a latent belief that it requires a lot of capital to get a startup into a position to go public. This isn’t well-founded in the data. A quick look at the companies reveals that:
73 startups raised less than $100M.
31 startups raised less than $50M.
10 of these companies went public having raised less than $20M in VC.
Veeva, which is among the 20 most successful startups of the last decade, raised only $4M.
Atlassian, a member of the top 10, was bootstrapped.
You need less than you think.
4. Venture Capital has diminishing returns
The average market cap of the 30 most funded startups is ~5X higher than the average market cap of the 30 least funded startups.
However, those better-funded startups required more than 50X the capital to earn those returns.
Looking at the median values for each group, investors put nearly twenty times the capital into the top group to get a 3X better return.
Firms that maximize assets under management and that are attempting to post huge dollar returns can point to this IPO data as a validation of their strategy. Alignment-focused venture firms like ours can take comfort in the fact that the lightly-funded startups have astonishing multiples.
5. Outliers create bad mental models for founders
Uber raised over $13B of venture capital. Depending on the day Facebook is worth over a trillion dollars. These iconic success stories have become anchor points in the minds of entrepreneurs despite being truly atypical outcomes and a poor model for how any given startup is likely to perform.
For instance, if you remove Uber, whose fundraising skews the investment column, and Facebook which distorts the market cap column, along with Tesla which is idiosyncratic in a number of ways that do not apply to typical startups, the numbers change dramatically.
The average market cap of a startup drops by ten billion dollars! The average investment falls by nearly $100M. Just three companies account for approximately about a third of total gains across the decade.
Venture capitalists can hope to benefit from outlier performances like these as part of a portfolio of dozens or even hundreds of startups. However, the odds of any given startup being one of the three biggest outliers in a decade are low.
A note about Tesla: Their unique funding history and the market in which they operate makes them an awkward inclusion in this list. They raised very little venture capital, but had access to massive government loans and other sources of funding which distorts some comparisons. We’ve tried to focus on median dollar figures throughout this piece to limit the impact of Tesla’s outlier market capitalization. If you’re curious, here is a link to the data without Tesla if you’d like to see how it compares.
6. Public markets aren’t particularly generous
If founders take one thing from this post we hope it’s that the median value of the successful startups in this sample is approximately four billion dollars. Over 50 of these publicly traded companies — nearly a third — have market caps that are <$2B.
Founders often want to accelerate as quickly as possible to a $1B+ valuation, often well in advance of revenue metrics that would justify such a valuation. It is understandable. “Unicorn” status is a helpful recruiting tool and a measure of success (however imperfect), but growing into that valuation might be harder than it first appears.
7. Maintaining valuation is tough
Even if you’re able to get a high valuation from the public markets to start, holding it over time can be hard. There are a dozen companies on this list that have market caps/exit values that are lower than the amount of VC and IPO proceeds they’ve raised.
Over 25% of the companies that went public in this period have since been taken private either through acquisition, merger, or private equity.
For all the criticisms of venture capital it can be downright generous when compared to the public markets.
8. Some of the best companies are rarely discussed
Many of the startups on this list will surprise no one and they have been endlessly studied, debated, and celebrated. Books have been written about the management philosophies and their founders have been subjects of hagiographic biographies. However, many of the most successful companies are relatively under-discussed.
ServiceNow, Crowdstrike, Workday, Veeva, Livongo, The Trade Desk, Palo Alto Networks, Cloudflare, DataDog, and ZScaler are some of the most successful companies of the last 20 years, but they almost never trend on Twitter. Few outside of their industry can articulate the strategic frameworks that have propelled them to success or how their org charts drive innovation.
Even ostensibly consumer-focused companies like Wayfair and Roku aren’t particularly big features in the entrepreneurial discourse. There are more paths to success than many believe and some of the most fruitful have barely been traced.
9. Four of the 20 least-funded companies are decacorns
There’s a belief among some investors that deploying huge amounts of capital is the only way to build substantial businesses. Among the twenty least-funded companies, four are decacorns and more than half of the least funded startups are worth more than the median market cap of the data set.
Fun fact: three companies from this least funded group, Atlassian, The Trade Desk, and Veeva, also appear on the previous “most valuable” table as well!
10. B2C Companies are worth more, But there are more B2B winners
The breakdown between B2B and B2C businesses is fascinating. B2C startups create more value in aggregate despite there being half as many of them.
However, removing the previously discussed outliers (FB/TSLA/UBER) impacts the statistics dramatically. The aggregate market cap drops by almost two trillion dollars, though the median values remain stable. It is worth noting that there are more than twice as many B2B companies on the list, so if you’re interested in probabilities there’s a strong case to be made for SaaS. Also, the notion that B2B startups are more capital intensive — a holdover from the Dot-com boom and early Web 2.0 — is largely disproven by this data.
Capital has no insights. This is one of our core beliefs as investors, and we believe this data supports the thesis. That said, this data isn’t the last word on anything.
Some excellent startups have entered the market over the last two years which aren’t reflected in this sample. The focus on the existing stock indices also doesn’t capture the emergence of DeFi and the broader crypto landscape which will likely be a big part of the mix in the coming decade. Still, we think this data is important and should be understood by founders as they make decisions about fundraising.