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Guy Turner

Your startup is a long race - plan accordingly

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The startup and venture market is opaque. With many quick exits and very limited information about how those exits performed (but lots of stories), many entrepreneurs and investors are looking for a quick exit. While there are a few fast success stories, like Instagram’s near $1B exit in two years, most startup successes take many years.

The quote “Every overnight success takes 10 years” comes to mind. I’ve heard something similar from several sources: Eddie Cantor (comedian only my grandma would remember), David Hansson at 37Signals and others. When you look at the data, this proverb is increasingly true. Basil Peters did a great analysis of startup first financings to exit through 2008. The chart below expands on Basil’s post, analyzing hold period distributions from 1995 to 2012 and overlaying real GDP. We measured hold to exit from founding, not first financing; in this case, I prefer the entrepreneur’s perspective. Thank you HPA Associate Michael Chen for doing the grunt work on this!

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Source: DowJones VentureSource, US BEA   Notes: Incudes US IPOs, merger/acquisitions and asset acquisitions; includes tech enabled business and consumer services, healthcare IT and other software; bottom of bar is 25th percentile, middle line median and top of bar 75th percentile.

In each year for companies exiting in that year, the chart shows the distribution (25th, Median, 75th percentile) of how long exit took from founding.

The trends are pretty clear. After a brief stint of short hold periods during the 98/99/00 startup gold rush, median hold periods have exceeded 8 years with a widening distribution. The gold rush dip correlated to extremely high real US GDP growth that we have not seen since then.

 

WHY DOES THE TREND LOOK LIKE THIS?

The precious resources in the US are talent and good ideas - not capital. In the late 90s there was voracious GDP growth screaming optimism about the future, a growing realization that the economy was starting to move online and wide open IPO markets. Corporations and investors (read institutions and consumers behind IPOs) were desperate to acquire or invest in the talent and new ideas that would continue high rates of growth into the future, even if they didn’t know exactly where it would go. The result was fast exit for startups. Peter Thiel would say that this regime of “indeterminate optimism” ended in 2007 with the financial crisis, but my personal belief is that it ended with September 11th, which moved us more in the direction of “indeterminate pessimism” in Peter’s framework. “We don’t know where the world is going, and it probably won’t be good.”

I’m getting a bit ethereal, but the point is this new outlook (and Sarbanes Oxley) leads to tight IPO markets and companies sitting on piles of cash instead of acquiring for growth. This results in much longer exits for startups in general. There are, however, exceptions. You’ll notice in the chart that the 25th percentile is dropping, meaning that a chunk of startups are exiting faster despite a relatively constant median of 8 to 9 years. This goes back to talent and ideas – in particular tech talent. Despite high general unemployment rates over the last four years, there is a dearth of tech talent. My hypothesis is that the downward stretching of the distribution reflects the acquihire trend as large tech companies gobble up developers, a precious resource.

 

WHAT DOES THIS MEAN FOR ENTREPRENEURS?

You might be able to get out quick with an acquihire, but do you want to? This is a very personal decision for founders and investors - one that has been much written about. Just remember that an acquihire is probably not the win you or your investors were looking for when you started.

Sans, acquihire, plan for the long haul. The difference between sprinters and marathoners is that marathoners think many miles out. This is true for the best entrepreneurs both personally and professionally.

  • Is your co-founder someone you can work with for years? You would be surprised at the number of teams we meet with clearly absent chemistry between founders. They don’t last long. If the teams are lucky, they figure it out sooner than later.
  • Have you built a network of advisors to help you plan for and get through the many phases? There are many stages in the evolution of a startup. You need people not just to navigate the now but also to help you look forward to the future and anticipate things before they happen.
  • Are your investors in it for the long haul too? Funds have a finite life. You should know whether your fund partner is at the beginning or end of their investing period, and what their expectations are for exit.
  • Are you (and your spouse) personally ready for this? Eight years plus is a really long time. In that time, you may meet someone, get married, have kids, have to take care of a sick parent, need to move for personal reasons, etc. While things change, thinking about and discussing the impact of these possibilities ahead of time can help avoid a lot of pain in the future.

You may need to be THE winner in your space in order to exit well: A consequence of public investor and corporations’ new attitude on the future is that they often wait to see things play out before they make a move. Consider the recent and pending IPOs: Facebook, LinkedIn, Pandora, Groupon, Twitter, etc. These were very clear industry leaders before they “qualified” in investors’ eyes for IPO. With increasing consolidation across many industries and veritable tech oligopolies (Google and Apple), there are often fewer great corporate acquirers in any industry, and they too may want to wait for the winners to emerge. It may no longer be an “everyone will buy one to compete” scenario. The good news is that when you’re the winner, public markets and corporations will pay up… and both have piles of cash to do so.

 

Guy Turner is a Managing Director of Hyde Park Venture Partners and member of Hyde Park Angels. Follow Guy @guyhturner.

Michael Chen is an Associate with Hyde Park Angels

 

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Comments

Ninos Youkhana

Nice!

Brandon Bechtel

As Nick and Matt said, this is a great post. I appreciate the data you used to back up your point. Although it doesn't necessarily coincide with the point you make in the article, I'd be curious to see the distribution of industries for exits each year.

Guy Turner

Thanks, Brandon. I hope to slice it by industry as well.

Matt Moog

Another great post Guy. An equally important consideration should be whether the "exit" is the right yard stick. I know our world is dominated by an environment where success is defined by how much money you raise which causes the focus to be on exits but from my point of view nothing is wrong with holding and growing a profitable business over a very long period of time. Even multiple generations. In the start up world we think in terms of 3,5,and 7 years cycles, but if you talk to owners of multi-generational businesses they tend to think in terms of decades or generations as their time horizon. Building your company with a specific exit in mind can lead to a series of misguided decisions based on what you think the potential acquirer might value. If you instead optimize for profitability and sustainable growth you buy yourself something better than an exit. You buy yourself options. I wonder what your analysis would like like if you focused on years to profitability? That would be a interesting lens to view the lifecycle of startups through.

Guy Turner

Matt, great thoughts! I couldn't agree more. HPVP coaches a lot of entrepreneurs that success is not defined by whether their business is venture backable or whether they decide to raise venture, even if they can. That said, if a company decides to raise venture (and the data above are premised on that), then exit becomes an important milestone in the long run to get entrepreneurs and investors aligned liquidity. Because asset light, high-growth businesses (eg, digital startups) are hard to finance with traditional sources (bank debt), angels and VCs may become the devil an entrepreneur has to live with.

I love the concept of options. I think I heard from Troy Henikoff once that the most important milestone for a business (not just a startup) is when it reaches CF positive. At that point, options increase significantly. We coach our portcos on this all the time.... in a world of tight Series B, those options are increasingly important.

BTW, if you have any ideas on sources of data for founding to CF positive, I would love to follow-up. That would be a great analysis.

Nick Farina

Great post, Guy. It's a good reminder for entrepreneurs that a few months of runway is a pretty clear path to failure. On the bright side, I find the long road to success to be very rewarding. Getting to know your industry and your co-founders can be a lot of fun and, with time, new opportunities can present themselves as well.

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