The era of unicorn startups has created a distorted view of entrepreneurial success. All the talk about billion-dollar exits has inflated the numbers that define a win. Starting and selling a company for $100 million dollars is an outlier event in terms of pure entrepreneurial probability, but such outcomes are viewed as well short of success in many corners of today’s startup world.
This bizarre belief isn’t universal, but a surprising number of VCs and industry observers are thoroughly unimpressed by low nine-figure exits.
In our hype-driven society, this actually isn’t so surprising. Political reporters want to write about the president and the Supreme Court, not state government. Likewise, tech journalists want to write stories about companies that spell million with a “B.” Investors at billion-dollar funds want to deploy $50 million into winning companies, and $100 million exits are seen as consolation prizes instead of reasons to cheer. In this echo chamber, a $100-plus million exit seems like a jumbo-sized acqui-hire.
To put this reality distortion into context, we examined the outcomes of a special segment of the successful founders over recent decades — those who have become VCs. Looking at a broad cross-section of top VC firms, we identified 63 investors who have a background in starting companies. Only 11 of those founders-turned-investors have built enterprises that have IPO’d or sold for more than $1 billion.
Many of the most successful investors built exceptional startups, which only by today’s distorted standards look like “modest” economic outcomes. Y Combinator’s Paul Graham is one of the most influential venture capitalists of the last 10 years, yet his startup Viaweb sold for “just” $49 million. Viaweb was a success by any realistic standard, but perhaps not by today’s hyped success narrative and fundraising stockpiles. The company only raised $2.5 million before its sale — a pretty impressive return and an amazing precursor to what was to come for Paul Graham. It turns out that “small” exits can lead to big things.
Belittling $100M success stories
Not only is selling a company for $100 million often scoffed at by VCs, at times it is outright mocked by the startup community. Aaron Patzer became famous for building Mint.com, and the site’s powerful UX was such a breakthrough that Intuit paid $170 million for the company. He didn’t buy into the “go big or go home” ethos; instead, he earned a fortune — and was roundly ridiculed for it. The disdain for “small” $100 million sales is so strong there’s even an Urban Dictionary entry for selling your startup for too little money — it’s called “Pulling a Patzer.” No seriously, go look it up. We’ll wait.
One of our portfolio companies recently sold to a tech giant for just over a hundred million dollars. The acquisition gave us an exciting multiple in a short period, and each of the co-founders made more money than LeBron James last year. This sale was quite possibly the best realistic outcome the company could have expected and a huge win for all parties.
In this unicorn-obsessed startup era, the lack of appreciation for these victories is a failure of vision at best, and unfortunate cynicism at worst.
“Go big or go home” is broken logic
We’re not suggesting entrepreneurs should look for quick flips or undervalue their company’s potential. We want to fund the next Uber, Google and Facebook. The reality is that not every business is suited for that. Part of the reason so many of these VCs had great outcomes at well below unicorn fantasy levels is that they raised the right amount of money for their businesses at valuations that maintained exit options.
Ideas that look like billion-dollar businesses at the seed stage can run into unexpected barriers. For modestly funded startups, these mistakes don’t need to be fatal. Unfortunately, most VCs are sized such that they can only succeed if they have several companies in their portfolio exit for more than a billion dollars. So VCs overfund startups with decent but uninspired progress, which cuts off realistic and enriching exit opportunities.
For example, you might have a company with $10 million last year in gross revenue that earned a $50 million valuation in its last round. This company hopes to double its revenue this year and is in a sexy category, but it has thin margins and a loose handle on its unit economics. In a normal environment, that company might raise $20 million on an $80 million pre-money valuation as the next step up.
It turns out that “small” exits can lead to big things.
Instead, in the current climate, a VC will see signs of progress, get excited by the market and convince the founders to “go big or go home.” This VC has $20 million burning a hole in his pocket (he needs to deploy this capital to raise his next fund) and convinces the entrepreneur to take $40 million (with half to insiders) on $260 million valuation instead. Now, with a $300 million post-money valuation, the company needs to sell for a billion dollars to be worth the VC’s time.
With only $10 million in revenue and very thin margins, the company has sold its option of a $500 million exit. If they had raised less money, a sale for half a billion dollars would have made everyone happy. Instead, they’ll probably increase their burn rate and raise more money. Eventually, this promising company could possibly go out of business when no acquirer wants to pay the inflated price and VCs lose interest in funding the excessive burn rate required to continue to fuel false hopes.
Fund size tells you everything
A lucrative $100 million exit is only possible if you don’t over-capitalize your business. If you want flexibility, you’ll have to fundraise strategically. This starts with choosing your investor. Founder Collective partner David Frankel often says, “fund size tells you everything.” As a very rough rule of thumb, your startup needs to be able to make a case for that it can exit for at least the value equal to the size of the VC’s fund. Raise from a $50 million fund, you can sell for $100 million easily. Raise from a billion-dollar fund and you need to shoot for the moon. Choose carefully and make sure you know what you’re signing up for.
There’s no shame in a $100M startup
The vast majority of tech companies are sold for less than $100 million dollars. Raising a relatively small amount of money and selling a company for $100 million dollars should be celebrated. For most founders-turned-VCs, this was the definition of success when we sold our own companies. In some cases, selling for tens of millions of dollars can be more lucrative for founders than selling for hundreds of millions, or even billions of dollars.
Selling a relatively successful startup can create enough wealth to allow you to live comfortably for the rest of your days. It can put you in prime position to start another company — or perhaps the leading accelerator in the world. Many founders turn “modest” successes in the entrepreneurial realm into amazing careers in venture capital.
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