Two Years of Startup Exits
An unrepresentative, statistically insignificant, but still interesting peek at the current M&A market
2020 and 2021 have been busy years for Founder Collective — In addition to making new investments, we were fortunate to have 19 exits. While this sample is neither representative nor statistically significant, I think founders could draw a few lessons from it.
This sample includes public offerings for Coupang, Riskified, ThredUp, and Desktop Metal, a few nine-figure acquisitions, and a cryptocurrency offering. Sadly, there were also several bankruptcies and a few exits in-between.
A few key takeaways:
🔌 Power laws work for VCs
The lion’s share of our fund’s returns from a returns POV has come from large, well-known exits (mostly IPOs). It’s no wonder that most funds are getting bigger. The “lean into your winners” and “billion or bust” strategy works well for VCs.
🧠 But founders SHOULD NOT think like VCs
Founders don’t have a portfolio of startups to spread financial risk. There’s no hedging at a startup.
This concentration of risk should make founders more cautious about protecting exit opportunities at the low-end of the spectrum.
🔕 Because most exits are modest
The median exit value from this sample was $44M.
If you only count the successful exits under $100M — the modal outcome — the average value was $28M.
VCs focus on $1B+ exits. Founders should pay more attention to <$1B exits.
👛 And “small” exits can make founders rich
If appropriately capitalized, a <$100M sale can be HUGE for founders.
Some entrepreneurs in our sample raised only a seed round of $1M-3M, so they generated ~$10M+ returns for themselves even with dilution. That’s a huge win!
🥞 Also, the quick flip is a mirage
Our data also showed that the average time to exit was 7.5 years.
That’s ~15% of a career and an even bigger percentage of the prime earning years!
Every year a founder puts in at a startup has a high opportunity cost. Make them count.
Moreover, business cycles come and go, and selling at the right time plays a huge role in outcomes.
Also, we’re humans first, and life events like getting married, having kids, and falling ill can all impact your decision to sell or roll the dice.
Preserve your options.
🚪 Fundraising is easier than exiting
Almost 60% of the companies that exited our portfolio in 2020 did so for a sum lower than the average pre-money valuation for a Series A in 2020.
This might cause problems down the road.
Humble exits that might have given founders a few million dollars after nearly a decade of hard work might not be available in the future, given the starting valuations that are common at this moment in time.
It’s critical to remember that founders’ choice isn’t between building a unicorn or going bust.
Strong startups are going to have a menu of options ranging from enriching acquihires to going public.
Don’t sell those genuine options for a paper valuation.
💥 Failure is an option
Despite being in a sustained tech boom, five of the 19 companies from our portfolio that exited delivered no value. Unfortunately, there is little press about these unfortunate outcomes, but it’s important to remember that startups can and do fail.
Founders need to be aware of what options they’re giving up as they raise more money attempting to build a more significant business.
You can maintain optionality without taking your eyes off the prize
$20M seed valuations appear encouraging, but they raise the bar for every milestone after that.
They *increase* the chance you’ll end up with *nothing.*
Doors can always open in front of you, but not behind you.
If you get an A+ on the midterm but flunk the final, you flunk the class. So although every investor and founder has to believe that the company can ace the midterm, every quiz, and the final, we still have to live with the cold, hard curve of startup survival.
You need to think hard about what kinds of exits would be meaningful for you, not just the ones your VC will encourage.
These scenarios are where your path to value creation and earning for you and your family diverges from your investors.
The power law has been good to us, and we have confidence that more big winners will emerge from our portfolio. Of course, higher valuations might impact our IRR, but I think we will manage.
I’m more worried about how founders will fare.
Our concern is that results will become more binary.
Startups will either return funds or fail to return anything at all.
VCs will be fine in this scenario.
But many founders who could have made money will lose life-changing opportunities.