In the early aughts, tech founders emerged with the same status that Wall Street traders and bankers held in the 90s: rockstars. At 22, Zuckerberg was named “Person of the Year” on the cover of Time (two years earlier, that spot belonged to one Barack Obama). Robert Downey Jr. modeled his portrayal of Tony Stark after Elon Musk, the CEO of Tesla and SpaceX. And of the six richest people currently living in the US, five are tech founders. Having a successful exit is a badge of honor.
The celebritization of Silicon Valley’s pioneers has lit a fire within many an entrepreneur: they dream of closing their early financing rounds, plotting an M&A, then swiftly exiting with deep pockets—and all within two to three years time.
We've seen a flood of posts offering smart exit strategies or how to be creative when choosing the right one. So, it’s no surprise that the number of venture-backed companies in the past decade has risen exponentially, but their success rate has dramatically dipped:
Hard & Slow: 75% of Startups Fail Without a Successful Exit
At Preferred Return, we know a thing or two about failed exit strategies: over the better part of the last decade, we’ve valued 3,000-plus businesses for various reasons—transactions, financial reporting, or taxes. And nearly 75% of them had one thing in common: they were wrong.
They didn’t raise their next round of financing. They didn’t get acquired for a positive return. They didn’t reach a stable place, and they never went public. They didn’t pass go, and they certainly didn’t collect $200.
“The game has gotten increasingly
For the companies that are doing well—and the people who run them—the game has gotten increasingly harder. And looking at M&A analyses by Pitchbook, it’s gotten slower, too: the time between the first financing and exit, and the time between creation and exit, is much longer.
Velocity by Category
It certainly varies by industry, but across the board, we see that the time to exit for most has increased. Granted, there’s a reason that software companies are in the news so often: in the past decade, they have shown to be the fastest to exit, with a median length of 5 years after their first raise. (Compare this to semiconductors which are closer to 10 years.)
The trend of increase in time to exit from first financing is prevalent almost across the board:
Exit Strategy Success: A 24/7/365 Job
In the fastest-to-exit industries—and with a ton of good luck—you can bank on starting and exiting your company within 7 to 10 years. That’s a solid decade of round-the-clock work that seldom ebbs. In The Hard Thing About Hard Things, author Ben Horowitz puts it like this: starting and running a company is just a lot of hard (sometimes unpleasant) work and brutal battles. But there’s one more thing that Horowitz leaves out: it’s also a lot of time.
If you want to start a company at 20 and drop out of college, by the time your amazing exit strategy comes to fruition, you’ll be in your late 20s. You’ve given up your college experience, and some of your remaining careless years. You won’t get them back.
“Starting a high-growth company
is not for the faint of heart.”
If you’re a few years into your career and ready to make a jump at 30, by the time you have your exit, you’ll be in your late 30s. You’ve given up years of traveling the world with friends, starting a young family, or enjoying a balance of health, wealth, and limited responsibilities. You won’t get them back.
If you’re in the later part of your career when you start your venture (say, 40+), by the time your exit comes along, you’re in your 50s. If you have a few young kids, you’ll most likely forego watching them grow up, and, simultaneously, forfeit opportunities to become an executive at a large company in some of your most effective years. You won’t get them back.
I think you catch my drift.
“Know the path ahead—and just
how long it is.”
Lost Time, Limitless Opportunity
Starting a business is not just physically tough, it’s emotionally and psychologically draining—not just because of all the things that you have to do (with odds stacked against you), but because of the many things you sacrifice for at least a decade. Starting a high-growth company is not for the faint of heart.
But if you don't think about your exit strategy as much, and instead, want to work on a problem you can't stop thinking about with people you enjoy spending time with, then starting and running a startup may just be for you.
Still excited about your venture? Good. Right now, we’re trying to figure out why raising capital for startups is such a pain in the ass. What are you working on? Drop me a line. I’d love to hear it.
Jackson is a Senior Associate at Preferred Return, a tech-enabled financial services company focused on providing valuations services to startups. To date, Jackson and his team have delivered over 4,000 valuation reports to 2,000+ startups ranging from seed to pre-IPO.
He graduated from the University of Maryland, Robert H. Smith School of Business, is a CFA Level 3 Candidate, and you can find him playing basketball at the Y on 14th street and 1st.
Contributing analytics by Nicholas Canova. Nick is Preferred Return’s analytics and data visualization specialist, powering its technical research and analytics of the VC industry. Prior to this role, he was a Financial Analyst at Preferred Return. Nick holds dual Bachelor degrees in Finance and Economics from Boston University and a Master degree in Statistics and Data Science from Stanford University.