Overdosing on vc_ lessons from 71 ipos _ techcrunch global risks 2016

Venture capital is a hell of a drug. Market risk career Used properly, it’s like adrenaline energizing many of the greatest companies of the past fifty years. Equity risk premium australia 2015 Used incorrectly, it creates toxic dependencies.

The conventional wisdom in the startup community is that when building the very best companies, more capital can be leveraged to accelerate even greater growth. Subject to market risk But does this “go big or go home” approach stand up to scrutiny? In the best case scenarios, do companies that load up on venture capital actually outperform those that more efficiently deploy capital? We looked at 71 tech IPOs from the last five years to find out. Market risk management ppt Efficient entrepreneurship

At Founder Collective we’ve been talking to our community about the virtues of what we call “efficient entrepreneurship.”


We’ve written recently about the downsides of heavily funded companies, including the loss of exit optionality, and perils of unsustainable burn rates, but how does aggressive venture capitalization look on the upside? By studying the best cases of venture capital success, what can we learn about the benefits of raising lots of money?

The results were surprising – by examining the technology IPOs of the past five years, we found that the enriched (well capitalized) companies do not meaningfully outperform their efficient (lightly capitalized) peers up to the IPO event and actually underperform after the IPO.

Raising a huge sum of money is a requirement to join the unicorn herd, but a close look at the best outcomes in the technology industry suggests that a well-stocked war chest doesn’t have correlation with success.

Of the 20 most successful publicly-traded startups over the past five years (measured by current market cap), 14 raised in the neighborhood of $100M or less. Market risk analyst salary singapore Six raised less than $50M. Global solutions network One raised no capital at all. Us market risk premium These are shockingly small amounts of money when you consider the median privately-funded unicorn has raised $284 million dollars.

Evaluating startup performance is a messy business. Market liquidity risk management Late stage companies are rightfully secretive. Market risk jobs singapore Acquisitions are messy financial affairs often engineered to obfuscate the true value of a transaction. Market risk in banks The IPO market was the most transparent proxy we could find, and while imperfect, it is instructive. Global solutions group With notable exceptions, most of the biggest outcomes in venture capital are a result of IPOs. Managing the risks of organizational accidents By studying the relationship between venture capital and IPOs of the past five years, we can get an idea of whether raising more capital in the best companies correlates to better outcomes. Market risk management in banks ppt The data

Acknowledging that there is only one Facebook and that it is an extreme outlier among outliers, we excluded the company from most of our analyses. Global solutions Absent Facebook, the overall numbers still look pretty strong, but it is astounding to see how much one company skews the totals:

We only looked at companies that held IPOs between 2011-2015. Definition of stock market It would be interesting to go back further than five years, but it is also instructive to examine what is effectively the “unicorn era” in which private companies raised unprecedented amounts of capital. Market risk reporting We excluded companies that were founded prior to 2000 (e.g. Risk in stock market GoDaddy, FirstData), companies with unorthodox financing paths (e.g. Var market risk Match Group, RetailMeNot), and companies in Asia and Russia, because they have significantly different financing environments. Market risk in banks ppt The result is a dataset, available for review, that includes 71 companies. Hotel risk management jobs Most of the data was taken from Crunchbase, except where noted.

We also excluded late-stage private equity, secondary offerings, and debt from the calculations, though they are recorded in the spreadsheet. Market risk analyst jobs south africa We were less interested in the money raised in the IPO, as we viewed as a graduation point from the venture capital game and is largely a direct function of company size. Equity risk premium calculator The data certainly contains imperfections, though we did our best to get it right, and we’re open to feedback on the dataset, which is why we’re making it public. Managing market risk The best case for “Big VC”

This data might suggest that “go big or go home” makes some financial sense, especially for investors. Market risk ppt The most heavily funded companies do have larger total dollar returns. What is the market risk premium Counted together, the 20 best funded companies on the list raised $6.7B in VC and have an aggregate market cap of $62B, for a ~9X return.

That’s a $14B dollar difference in aggregate returns. Risk of stock market That’s non-trivial, especially to VC as an asset class. Weather risk management jobs However, ~$12B of that difference is accounted for by Twitter, who raised a little less than a billion dollars in VC. Market risk policy So aside from those Facebook and Twitter, venture capitalists spent ~$5B to make an incremental $2B. Market risk management in banks pdf It’s important to note that the stock market is volatile and that over the course of writing this post, the 20 most enriched companies have fluctuated dramatically. Market risk analysis pdf Still, the variance is usually driven by one or two outlier companies.

It is true that there are a few companies founded each year that drive the bulk of the returns. Australia market risk premium 2015 It is also true that in the case of only a couple of outliers (Facebook and Twitter), heavily funding the best companies is a winning strategy for investors. Market risk pdf However, It is not clear that VCs have been able to consistently identify the best performers and have instead overfunded even the most successful companies.

This isn’t a knock on the VC model—it’s an asset class predicated on risk. Market risk management policy The best firms in our industry have shown an ability to run this high risk playbook over many funds.

It should be a lesson for founders though. What is market risk premium Companies like Facebook and Twitter are critical for the health of the ecosystem, but are not a good model for other startups. What does a market risk analyst do Unless a founder is very confident that they are building the next Facebook scale business, they would be better served focusing on creating higher multiples instead of a higher exit value. Current market risk premium s&p 500 VCs have a portfolio, entrepreneurs get one shot (at a time)

VC can afford to risk overfunding a dozen companies in order to be a part of the epoch-defining winners, but entrepreneurs only have one shot. Australian market risk premium As a founder, are you willing to take 4X more risk for what, even in the best cases, results in a 24% premium? That’s basically what the companies on the top of this list did:

The financial calculus for founders is even worse than it appears. Market risk premium Incremental funding will probably come with extra dilution, and pre-IPO preferences that will favor the VCs if the startup’s hot streak falters and it doesn’t get public. How to reduce market risk Beyond the magnitude or risk, more capital limits the number of possible exit paths. What is current market risk premium The founders of 20 most efficient companies likely could have successfully sold their companies at any point along their development for a healthy return. Market risk management pdf Their enriched counterparts are locked into billion dollar exits with diminishing returns on capital.

It’s conventional wisdom in the VC market that investors should heavily lean into their winners, but are you better off doubling down on winners for diminishing returns or funding a new crop of startups with the potential to return 10, 20, or 30X? Davids versus Goliaths

Though it’s a ridiculously small sample, look at companies that raised an objectively large sum of money—say over $200M (nine companies in this sample), versus an equal number at the bottom of the list. Market risk premium 2016 The results are staggering:

Market value at the IPO is important because it is often a marker of the venture capital exit value, but it’s also interesting to consider how these enriched companies compare to their efficient peers in the long term as public companies. Risk of stock market crash Does instilling a sense of fiscal restraint early, where growth comes from disciplined customer acquisition, not a venture capitalist’s checkbook, lead to more sustainable businesses?

Though it’s a ridiculously small sample, look at companies that raised an objectively large sum of money—say over $200M (nine companies in this sample), versus an equal number at the bottom of the list. Market risk premium today The results are staggering:

Our hypothesis is that too much capital over time creates a culture that substitutes cash for creativity and operational discipline. Market risk example Big balance sheets allow companies to grow inefficiently, to paper over problems with headcount and spend, rather than confronting the core engine of value creation. Credit risk market risk Having less money forces a management team to make hard decisions early on and to cut off potentially wasteful problems that otherwise could linger indefinitely. What is market risk This efficient ethos becomes part of the long term culture of productive performance that is difficult to infuse in the enriched companies that never operated in a constrained way.

There is a fair counter-argument that the enriched cohort had higher valuations at the time of the IPO and that the value was captured by private market investors rather than public investors. Emerging market risk While possibly true, entrepreneurs and VCs should consider the implication of this argument is that public market investors may apply significant discounts to the increasingly large unicorn club that has raised large amounts of private capital prior to an IPO. Market risk premium nyu Shouldn’t there be a positive correlation?

It’s important to take a step back and consider how surprising this data set really is. Market risk premium 2012 The venture capital industry accepts as an assumption, that in the best outcomes, more money accelerates more success. What is the current market risk premium Some would argue that it’s nearly impossible for a true winner to be overcapitalized – these companies are reinvesting the capital into their success economic engines after all. Market risk analyst Capital gives you the ability to make more investment in drivers of the business – talent, R&D, customer acquisition, etc. Beta market risk Intuitively, it makes sense that enriched companies should do better than their lightly funded counterparts.

We would have expected to see correlation in these numbers and be debating the embedded causality assumption that we assume in the venture industry. Risk analysis in stock market In other words, we’d expect to debate whether the money caused the success (causality), but take for granted that the most successful companies were in a position to raise the most money (correlation with unclear causality).

It’s shocking that no meaningful correlation is present in the data. Market risk premium calculator Although the best performing companies are in the best position to raise the most capital, they don’t necessarily do so.

With the exception of a few critical outliers, the better funded companies aren’t meaningfully bigger or better performing and actually become worse public companies. What is the market risk premium today VC is an outlier business, a vocation premised on volatility, but the fact that highly-funded companies aren’t clearly outpacing their cash-restricted competitors shows there is a point of diminishing returns for capital even among the very best companies. Market risk premium s&p 500 The data suggests that VCs struggle to understand where that point is. Market risk factors The adage in VC has been that there are only 15 companies born every year that matter. Stock market risk If loading cash into companies is your game as a VC, it appears that there are only 2 companies over the past 5 years that actually mattered. Global risks 2016 That’s a nearly impossible game to play. Ibbotson market risk premium 2015 What about acquisitions?

Looking at the data, 15 of the 20 best performing startups of the last five years raised less than $125M from venture capitalists. Current market risk premium 2016 (We’re including Wayfair in this tally, which didn’t raise any capital for the first 10 years of the company’s life and whose deal was more akin to late stage private equity). Market risk premium australia 2015 Four, Atlassian, Shutterstock, Textura, and SkullCandy succeeded with no venture capital whatsoever. Stock market risk and return Splunk and Palo Alto Networks, combined, raised approximately $105M and currently have a shared market cap greater than $20B. Equity risk premium historical data Groupon and Zynga each raised multiple $100M+ rounds, nearly $2B in total, and are currently worth ~$5B.

We know this analysis is imperfect. Historical market risk premium s&p 500 Some of the companies that IPO’d in 2015 haven’t yet reported four quarters as public companies and even if enriched with VC, might have more positive long term results. Market risk premium uk Still, this data should give founders and VCs pause. Market risk calculation Though increasingly unfashionable in the unicorn era, it is quite possible, and perhaps even advisable, to build a billion dollar publicly-traded company with under $50M in venture capital.

Looking at the data, 15 of the 20 best performing startups of the last five years raised less than $125M from venture capitalists. Market risk management in banks (We’re including Wayfair in this tally, which didn’t raise any capital for the first 10 years of the company’s life and whose deal was more akin to late stage private equity). Market risk factors examples Four, Atlassian, Shutterstock, Textura, and SkullCandy succeeded with no venture capital whatsoever. Risk stock market Splunk and Palo Alto Networks, combined, raised less than $100M and currently have a shared market cap greater than $20B. Us market risk premium 2016 Groupon and Zynga each raised multiple $100M+ rounds, nearly $2B in total, and are currently worth ~$5B. Market price risk Capital raised is a vanity metric

Fundraising is a strategic choice that needs to be as carefully considered, just like your product roadmap, marketing strategy, or hiring plan. Market risk premium south africa 2016 Unfortunately, entrepreneurs tend to make funding decisions opportunistically, or even worse, out of a sense of pride or false validation.

If you’re enjoying success, money will be thrown at you. Market risk management It’s flattering and having a strong balance sheet can be a good thing, but it does limit optionality and creates more difficult exit paths. Market risk capital rule Capital is rarely your biggest constraint or the biggest opportunity in front of you. Market risk var Worst of all, the evidence shows that there is a limit to how much your balance sheet will help the long term value of your company even in the very best outcomes. Market risk premium us Putting this data set in perspective, while the enriched companies underperformed, they were modestly financed compared to today’s unicorns. Risk management system in stock market Our median enriched company (top 20 in terms of capital) raised $193M before going public. Market risk career path Today’s unicorns sit at a median of $284M in capital raised and they may yet need to raise more money to reach the public markets. Market risk career Our data suggests that this is not a positive sign for long term success. Equity risk premium australia 2015 Buyers beware!

The point of this isn’t to encourage bootstrapping; nor is it celebrating slow growth. Subject to market risk We’re not advocating a “Just Say No” position on raising venture capital – we’re VCs after all. Market risk management ppt Though some companies are able to achieve huge success without fundraising at all, they are very unusual. Market risk analyst salary singapore Startups don’t get bonus points for trying to build a company on hard mode.

The founders of these efficient startups had the same ambition and hunger to build businesses as their enriched counterparts. Global solutions network They just did a better job of it. Us market risk premium These more efficient entrepreneurs are building real, international multi-billion dollar organizations with far less risk and likely own much more of their companies. Market liquidity risk management The surprise in this analysis is that it appears likely that being capital constrained to some degree was helpful, not harmful, in that journey. Market risk jobs singapore This isn’t an attack on VC — it’s a celebration of entrepreneurs

The mystique of entrepreneurship used to be in the magical act of making something from nothing. Market risk in banks Now, we celebrate founders who act like banks by raising huge sums from venture capitalists. Global solutions group We think this is unhealthy and needs to change. Managing the risks of organizational accidents While the startup market has been flooded with capital, founders don’t need to raise huge sums to be successful, and it seems that even in the highest upside cases, raising less money leads to better companies. Market risk management in banks ppt Yet today, most founders are convincing themselves to take the opposite approach.

We’re making an argument for the efficient use venture capital, not against the use of venture capital. Global solutions Venture Capital is an essential ingredient in the success of many startups, and there are rare times when adding huge amounts of capital is justified. Definition of stock market But like most drugs, there is a time and place for their use and the side effects should be clearly noted to potential users.

Our portfolio contains a number of companies that have followed the enriched model and others that were so efficient that they seemed fueled by the scent of a petrol soaked rag. Market risk reporting The advice for both is the same. Risk in stock market Think about how you would run your company differently if the money in the bank was the last you’d ever get? The answer to that question could make you a billionaire. Var market risk Featured Image: Fanatic Studio/Getty Images