There Aren't Many Exits Over $100mm

I was reading Mark Suster's latest blog post (actually its a presentation embedded into a blog post) and I came across this slide.

Exits over 100mm

I don't know what the source of this data is and I don't know if this is just M&A exits or if it includes IPOs as well. It really doesn't matter for the basic point that Mark is making with this slide.

Based on the NVCA statistics on the venture capital industry, there are on average 1,000 early stage financings every year. I suppose a few of those 1,000 financings are for the same company, but I doubt that many are. So we can use 1,000 as an approximation of the number of companies that get funded in a given year.

And somewhere around 50 and 100 of them exit for more than $100mm every year. So 5-10% of the companies financed by VCs end up exiting for more than $100mm.

At at time when the average Series A round is now north of $20mm (based on very anecdotal evidence and not at all scientific), this poses challenges for the VC industry.

The real math is a lot more complicated because of follow on rounds and such, but in order to keep this simple, let's assume all Series A deals are done at $20mm post-money and 5% of them end up exiting for north of $100mm. And let's assume that the average valuation of the exits north of $100mm is $250mm (I think that's a good guess but it could be off). That means you don't get your money back on your entire 20 investments with the one that has a good exit. The simple math is 20×20=400 which is greater than 250.

If the average valuation of a Series A deal is $10mm, then the cost of 20 early stage deals is 20×10=200 which is less than 250. That means the winner pays for the rest of the deals. And that is the model that I know works in early stage VC. Anything else is going to be challenging for the industry.

Are we in a valuation environment that is challenging for early stage VC investors? Yes.

#VC & Technology

Comments (Archived):

  1. Noam Makavy

    Higher valuations are certainly an unwanted side-effect of a frothy market for VCs, but there are also advantages.I believe that the 19 start-ups that don’t exit north of $100mm fare better in a frothy market. It is easier for them to get further funding and avoid bankruptcy and it is also more feasible to get acquired (or acqui-hired, if you prefer) with less than stellar results.It may be that in today’s market VCs should tweak their investment strategy from “all or nothing” to “all or something”

    1. fredwilson

      i don’t agree. getting funded at $20mm in the first round will make itharder to get the next round if you aren’t executing perfectly

      1. Noam Makavy

        Down rounds are still happening as far as I know.How many of the 14 companies acquired by Zynga in the past year do you think would have been acquired in 2008?

        1. Aaron Klein

          Sure, down rounds may be happening, but no matter how you slice it, you would have been better off as an entrepreneur raising less and then having a lot more dilution room to do an up round.

  2. Bcarroll

    Why do you assume every VC fund will have 20 companies (as opposed to 12 or 25)?

    1. fredwilson

      i used the 20 because of the 5%

  3. LIAD

    Challenges are exciting.Separates the men from the boys. Makes for better armchair viewing.VC’s having to up their game is surely a good thing.—-If the situation was reversed and a founder was musing about low valuations making it harder for them to achieve a certain level of liquidity on exit – people would tell him to buck up, work harder, be smarter. Doesn’t the same apply here?

    1. fredwilson

      yes, of coursei am not complainingi am just making sure everyone understands how hard it is to make money doing early stage deals at $20mm pre and higher

      1. LIAD

        for what it’s worth – I was very careful not to use the word complaining.Diplomatically chose ‘musing’ instead 🙂

        1. fredwilson

          but i read complainingit is all goodthe regulars here can say and do whatever they wantthey’ve earned it

          1. reece

            haha. just like regulars at a bar. i love it.

          2. fredwilson

            I’ve used that analogy before. AVC reminds me of Cheers

          3. reece

            ha. good one.

          4. kenberger

            I’m proud to be the house IRregular here, reece.

  4. Andrew Lawson

    Isn’t your math slightly missing other exits that didn’t make it to $100mm. If 19 out of 20 companies go bust then what you are saying makes sense, but surely a number of companies make the VC money without going to 100mm? Do you lose money on a 50mm exit?

    1. fredwilson

      yes, this is an overly simplistic approachbut what i have found over the years is that if one investment doesn’t return the entire fund, it will be a disappointing fund. the loss rate on early stage VC is about 33%, and another 33% will be mediocre at best, so the big wins have to make up for a lot of losses

      1. ShanaC

        Why is that – why aren’t returns more bell curved so that a group of companies can return the fund without the need for a ballpark hit

        1. Aaron Klein

          VC returns are a bell curve shape.It’s just that VC investments have such a wide bell that the curve is almost unrecognizable. :)VC returns = -100% to +20,000%Typical equity index returns = maybe -9% to +9%?

          1. ShanaC

            Ugly looking bell there….

          2. Aaron Klein

            and the top of the bell is down there in the -100% range, so it’s more like a waterfall curve 😉

          3. ShanaC

            That sounds like something is going wrong with the investment process….

          4. Aaron Klein

            No, I don’t think so. It’s part of the beauty of the American system and the venture capital asset class. Anyone can start a company, and VCs can make all-or-nothing bets on crazy entrepreneurs.If you’re going to play a role in creative disruption, expect it to be disruptive… 🙂

          5. ShanaC

            Yes, but it makes creative destruction seem so unviable from a monetary pov

          6. JamesHRH

            Andreesen Horowitz motto is something like ‘there are 15 important tech companies that emerge each year – we want to be in all of them.’In 2001 I was working with startups, as a executive for hire. A person from Compaq leaned on me about how ugly it must be.I told her I see as many good startups in 2001 as I did in 1998 or 1999. I just don’t see as many lousy ones.When capital flows into startups, there are more ugly ones but no more good ones.

  5. JimHirshfield

    I agree that it makes follow on rounds potentially harder for entrepreneurs. Also agree on how it screws up VC fund results. Unfortunate fact of life is that Vc’s external problem effects the entrepreneur. IOW, not cool to have my startup’s valuation dictated by a fund’s dynamics; the startup is worth what it’s worth independent of what else is in the portfolio.

    1. Cam MacRae

      But if you’ve got your hand out your startup’s valuation is always dictated by a fund’s dynamics insofar as the valuation reflects what the fund is willing to pay.

      1. JimHirshfield

        Certainly. Just sayin’ it’s a weak link, if a link at all, between what a fund needs to do because they may have filled their basket with a bunch of lemons and the value of my company. If I sell my car to some guy, I shouldn’t sell it for less than market value because the guy made a couple bad deals with other car sellers.That said, I’m not arguing with reality. I’m well aware of why the situation is what it is re VC funding.

        1. Cam MacRae

          I hear ya. I’m saying that in a market with few buyers, the price he’s willing to pay after a couple of bad deals approximates the market value. 

  6. Dave W Baldwin

    Mark puts a lot of work into his posts.It isn’t a matter of trying to critique the assumptions because it comes down to all of the buyouts you read about do not mean mega profits for the VC’s involved… the same for the Angels in the step before.That is why I’ve been using the term Law of Accelerated Returns often because from the Dev standpoint, you need to do something that will be of use in the near future.  To do that, you have to know what the landscape will be regarding tech level/understanding, including the OS to the end run customer.Do that and you are in a better position to launch an independent product that can deliver profit to the early investors, feed R&D, feed marketing and so on.Then you can talk to VC’s more from a strategic point where the investment can be more strategic.Hopefully the decrease in needed OH can help offset odds of loss affecting the gain as we move forward.  

  7. Robert Thuston

    1000 is a small number. There may be 10,000 good ideas people are working on, so they better work there tails off to rise above the noise (great hires, great advisory board, great execution, and vision). And then continue to dig deep to make it in to the 74 that get a valuation over 100 MM. Curious to know the average time a company has been around that gets a 100MM exit.

    1. fredwilson

      we use 5-7 years as our timeframe when we make an early stage investmentsome will happen quicker but others take even longer

  8. William Mougayar

    There are 2 issues raised here, 1) not too many exits over $100m, 2) the math isn’t good. For 1), is it possible that we’re a bit early to see more exits over $100m. I think the trend is up, and it looks like there are several companies in the funnel that have the potential to command more than $100m in the next 18 months, so one has to look at what’s coming down the pike too.2) The math isn’t good. Tha’ts never good for the industry. That’s how “resets” and pull-backs happen. I would ask- who is to blame? In most cases, it’s the VC’s that set the terms of the valuation. In rare cases, the company is hot, and gets greedy. So, head over to Canada, where the average Series A is under $10m, and there are lots of quality companies that can use US VC money. It’s a message I’m sending to some US VC’s that still think the distance and country factor are a stumbling block.

    1. fredwilson

      we’ve got one in canada and we will do more

      1. William Mougayar

        But what do you think about the quality of the companies in the funnel which is likely to increase the # of exits or exit dollars over the next 18 months? If the inventory is there, doesn’t that take care of the math issue?

        1. fredwilson

          the quality is certainly not better and might be worse

          1. William Mougayar

            OK. So, the end of the barrel doesn’t look good.But who is to blame really? Is it the VCs (who set the valuation terms), the media (who typically hypes things), or to the entrepreneurs (who get greedy)? And how do you suggest these challenges can be addressed?

          2. fredwilson

            It is not the entrepreneur’s fault. They are raising funds at market as theyshould. The problem reveals itself in the mirror every morning

          3. BradDorchinecz

            Limited partners can be at fault as well. Over $100 billion was invested by LPs in VC funds in 2000; that was way too much, by multiples. Results were terrible. Around $30-35 billion was invested per year from 2004-07; that was too much as well. Results have been mediocre so far (although the current IPO market should raise returns from these vintages). About $10-12 billion was invested per year in 2009-10; that seems about right.We’ve had a hard time understanding how to make the math work for venture funds in this environment who raise more than $250-300 million and who have more than 4-5 partners. Only the top 3-5 firms in the world can pull it off.Hopefully the “invisible hand” can address these challenges. If venture doesn’t generate the returns most investors are looking for, fewer will invest, creating better return opportunities for those who remain invested.

          4. ShanaC

            It isn’t just me when I think there aren’t services I really can recommend to friends online.  I feel much more normal now about this issue.

      2. Dug Song

        Stop by Michigan on your way to Canada!In Ann Arbor, we’ve enjoyed a multi-hundred million dollar exit every year for the last few years – HealthMedia (2008), HandyLab (2009), Arbor Networks (2010), Accuri (2011). The University of Michigan spends over $1.5 billion annually research, and we have over 8,000 engineers on campus alone. Michigan’s current governor was formerly an Ann Arbor venture capitalist (A2VC? :-)Steve Blank also had a nice writeup about his recent visit here:…

    2. George Reese

      As a general rule, VCs don’t seem to look small Series A rounds. Pretty much no start-up (unless in manufacturing or medical/med-tech) needs $10M in Series A financing. The VCs drive that kind of investment and then force themselves in search of exits in excess of $100M. The reality is that a healthy VC environment doesn’t need exits in excess of $100M; we’ve just grown one that expects it.

  9. Tom Labus

    Just about every evening Bloomberg West interviews a new fund that has raised an inordinate amount of cash to invest in early stage starts ups.  These guys want to do deals quickly and this helps push valuations higher. There seems to be a lot of $ chasing a limited number of legit deals which lets not so legit companies enjoy the valuations too.  As always, at some point somebody will point out that the emperor is without pants. 

  10. Samuel Cubac, an Israeli VC

    The other variable is size of round – too many dollars funded puts pressure on exits as well.Large funds need to deploy large amounts of capital so rounds are bigger – good argument for small to mid-size funds 

  11. reece

    i had a chat with a friend the other day who got a great valuation on their first round, but needs to get back out to fundraise soon and hasn’t quite increased the value of the company since then.i asked what they’re thinking in terms of valuation and i just don’t think they’re going to get it.  sure it’s nice to have a great valuation in your early round, but it just makes it harder on successive rounds. in speaking with a very successful NYC entrepreneur a while back, they emphasized that you don’t usually make your money on the first round valuation… it’s your third round, when you’re really killin’ it that you get your bump in valuation as an entrepreneur.

  12. Harry DeMott

    There are a lot of thoughts behind this post:1. Size of funds (perhaps valuations are going up because early stage investors have not capped funds at $150M like yourself, but have $400M to put to work – much tougher to do – so you do higher valuations)2. Asymmetry of returns  – that $250M average you stated has a very large dispersion (valuations in the secondary market are over $1B for Twitter and Zynga in your portfolio – Linkedin and Pandora are public at over $1B) 3. More earlier stage investors – I have no data but my guess is that more angels and micro VC’s have popped up shortening the time to exit for companies – so traditional early stage Series A VC’s sometimes never accumulate enough share or power to stop a company from selling for $50M – because that outcome provides a fantastic exit for the founders and the angels.4. More focus on initial price – the press love these stories of big rounds – big prices, and many first time founders don’t realize the pressure this puts them under. I’m sure you see the same thing, but the more experienced the founder, the less interested they are in the cover price, and the more interested they are in the longer term value an investor can bring.5. Math is a tough thing to overcome – if you are shooting for a 20% IRR to your investors on a gross basis and 33% of your investments are a bagel (0% return) and 33% of your investments return their preference (i.e. you get your bait back) you need to generate a 7X return on the other 33% to get to a 20% IRR over 5 years on a gross basis. Factor in fees and incentives – and you really need more like a 9-10X return on the winners. Using your math, if you are doing series A deals at a $20M valuation and doing something like 20 separate deals – you need to have 6 winners of $200M or more (and that’s just your share of the company) If you assume that you own 25% of the company upon sale, you need 6 $800M total exits of companies over 5 years or you need a mega winner on the fund to make it work for investors. Very tough math indeed.

    1. fredwilson

      Congrats on Pandora HarryAs JLM would say “well played”

      1. Harry DeMott

        Funny thing, when I write comments, my dialog box doesn’t scroll down, so if I go outside the box, I post then edit to get the rest of the thought in – like I just did here. Amazing you got it so quickly, even though I went immediately into edit mode.Thanks for the comment on Pandora. I love the music space so it’s nice to see a bunch of very hard working, very focused, great people succeed in the market.I was lucky to be along for the ride.

        1. awaldstein

          Congrats on Pandora Harry! We probably have friends in common from Walden VC.

          1. Harry DeMott

            Absolutely. Been sitting on the board with Larry Marcus for a long time. Good folks.

        2. Donna Brewington White

          Wanted to add my congrats as well, Harry!

    2. reece

      in agreement on #4 Harry and that’s where entrepreneurs need to realize that a good price is only good in the short term. if you’re taking an investment, you should expect to be working with the guys across the table for five, seven, even ten years in some cases… you want good partners, not just trigger happy investors.

    3. ShanaC

      Congrats on Pandora.All things considered, how much asymmetry is there in the market both in early stage funding (has true series A been squeezed out?) and in exits?

    4. howardlindzon

      yes congrats on pandora….you toughed it out and won.

  13. Carl J. Mistlebauer

    I found the whole slide presentation very informative.  I assumed that there were more vc firms today not less and what I see from this one slide is a “maturing” of a market, you have 120 deals over 100m in 2000 then another peak in 2007 at 84m and logically with 2010 at 74m you might end up with a little higher figure in 2011 but then you can anticipate a drop in 2012. I have personally met with two VC firms to give “advice” on investments they were making in my industry in the 20m range and I cannot help but wonder if there is not a shift in the VC world away from investments that are homeruns and now looking at deals that are base hits. These type of deals would show up in your total number of deals in a year but would not show up in the number of deals that reach the 100m range….thus distorting the math.If more and more VC firms are “maturing” to a model where they look for homeruns for 33% of their portfolio and then seek investments for another 33% of their portfolio that generates profits with returns in the range of 20 to 40% then the balance of their portfolio becomes donuts or marginal….Having only dealt with two VC firms along with keeping up with the VC firms in KY/TN doesn’t really count representative database….

  14. Bijan Salehizadeh

    Fred- Mark’s data seems to be in line with what the Cambridge Associates data show.According to Cambridge, only 5% of realized venture exits over the past decade in IT/Internet related categories have been 5x or greater multiple of invested capital. Nearly 75% of all exits in these sectors are 1x or less to the VCs. (As a  healthcare investor, I take some small solace in the fact that healthcare has a better exit profile – almost 10% of exits are 5x or greater.)Cambridge tracks nearly 1300 firms, so it’s a pretty good index of what’s going on in VC.By the way, in the prior decade of the 90s, 21% of IT exits were 5x or greater. In the 80s, it was 16%.

    1. ShanaC

      What’s changed that the numbers are getting so bad?

      1. Dave ML

        Shana–I think what has changed is there has been too much capital chasing too few deals since the late 1990s. Prior to the late 1990s, VC was a very small cottage industry. There were not many VCs, their funds were pretty small, they chose their deals carefully and they managed to get good returns. They were helped by an IPO market that could take smaller companies public in a way that they cannot now…reasonable minds can differ on why the IPO market has changed, but there are not buyers for small technology companies now.For a decade, VC returns have been awful. Every study I have seen shows it as the worst performing of the alternative asset classes, generally by far, with returns very highly concentrated to the top 5% of funds. Pension funds and alternative asset managers invest in venture funds b/c they have to as part of their diversification strategy.  But there still remains too much capital, too many funds and now, given the current boom(let), too many companies for the returns that will ultimately sort out.  Ultimately, there are a lot of dollars going to work right now that will never yield a positive return.

        1. ShanaC

          So what should be done to get dollars chase different returns so that VCbecomes doable again (this sounds untenable)

          1. JamesHRH

            Nothing you can do – that’s the interesting thing about capital. It goes where it wants and, almost always, vehicles appear to carry it to the destination.Not high performance vehicles. Junkers.

  15. Chang Jeff

    Uhhh…did you say $20mm average series A?!Maybe thats the case in USV land but hardly the case in the broader VC industry (exhibit A from VentureSource: median pre-money for all first rounds in Q1’ll = $5.0mm, second rounds = $14mm).Perhaps we should re-phrase your last sentence…”Are we in a valuation environment that is challenging for early stage / CONSUMER INTERNET VC investors? Abso-freaking-lutely”

    1. Bo Brustkern

      Much agreed, Jeff.  The Cooley data show that the median Series A pre-money in all of 2010 was $7mm, and $5.6mm in 4Q2010. Even the Series B median wasn’t as high as $20mm. While we see plenty of unreasonable valuations in certain segments of the venture landscape, making an assertion that Series A valuations across the board could be above $10mm is unsupportable; past, present or future.  Perhaps it’s time to shop elsewhere?

  16. Peter Sullivan

    “I suppose a few of those 1,000 financings are for the same company, but I doubt that many are.” – FWReally? I think nearly 20-30% of those would be overlapping….

  17. msuster

    Hey, Fred. Yeah, sorry I didn’t source it cuz it was a PPT presentation on a big screen, but I wrote a post today on TC and I did source it there. It was Capital IQ. It is IT exits of VC-backed companies and excludes IPOs. On average there are about 20 VC-backed IT IPOs / year.However you carve the data, the order of magnitude is clear to me: many investors are over-paying for A rounds & B rounds and there aren’t data to support that enough high-priced exits are likely to justify all of this. The pressures are both competition from other investors for these rounds but also the prices (or uncapped deals) being done at earlier stages.And finally I like to point out to entrepreneurs who think otherwise, this challenge will impact both investors and entrepreneurs. The inability to get re-funded once markets normalize is a real issue. One I’ve lived through personally.

    1. ShanaC

      Doesn’t that mean that C rounds have been screwed up?  What happens when a company isn’t quite ready to exit and is past a B round?  Are the investors now going negative?

    2. Dave W Baldwin

      IMO, you were right to leave out the IPO’s which strengthens the overall concept you’re communicating.On all sides, you have to look at the before-present-after in realistic terms.  Otherwise, you can set up on the beach due to high valuations and be dismayed when a rough storm blows in.We can avoid the bursting of bubble through the right approach.

  18. Rakesh Parimi

    Fred, seems like VCs are attracted to start-ups that require $20M?Why not ones that cost as less as $1M to $5M (max) to get the whole thing going, early venture investment?When I hit enter I said .. go viral in 2 years, what I meant to say is .. start to finish development in 6 months and viral in 2 years on global scale 🙂 – something that can go from start to finish and then public consumption (truly viral in nature) for 2 years..

  19. laurentk

    What kind of pre-money valuation gaps are you seeing from SV > New York > London > Europe in general ? In terms of multiples ? Would love if you could share.

    1. DC Cahalane

      First time here posting, but came across this research this morning that might interest. An analysis of how VC in the UK compares to the US. NIce, clear hitting document,

  20. Daniel Kraft

    Fred, I agree with your gut feeling that VC have a tough time. There is a report by Ernst & Young I wrote about that might provide you with more details on the numbers. The thing I find interesting, is that most investors are closing less than 4 deals a year.

  21. Roberto Medri

    What Fred writes here is that the average VC (whose success rate is the market’s) makes <1x. But has this not been true pretty much at every point in time in the industry. The average hit rate might be in the ballpark of 5%, but the distribution is wildly bimodal: a few guys go as high as 33%-50% (they can select –and get– the good stuff), the rest goes maybe 2-3%. It’s clear that higher valuation depress returns for everyone, but I don’t think the impact on the cutoff line of who makes it and who does not is dramatic. It will be impossible to replicate the IRR of USV04, but I’d still take USV (or Foundry, True, GRP, etc) 08-11 over someone else in the best of times.

  22. DC Cahalane

    First time poster, but given the topic of discussion and the fact that lunchtime here in Ireland was spent reading a report on the performance of UK VC compared to the US, I figured it may be of interest to others.

    1. ShanaC


  23. Foundersuite

    The cause/effect starts even further up the food chain. To elaborate: A few years ago, I helped a seed stage VC put together their PPM and pitch deck for their inaugural fund (won’t name names to protect the innocent, but it’s a NYC fund).   A key part of the “pitch” centered on the strategy of investing smaller amounts in capital efficient companies that had comparatively shorter paths to exit.  In other words, put in $2m (at a reasonable valuation) into companies that would exit for $20 – 50 in 2-3 years.  This strategy worked well, and the fund had a number of high-ROI exits.  Now the firm is raising a second fund, and based on feedback / pushback from LPs, we are completely dropping the “fund cheap, exit fast” mantra; it was perceived (IMO incorrectly) as “aiming too low.”  So, another fund will likely soon join the pool of investors bidding up valuations.  I can foresee this scenario playing out with other super angel / micro-VC funds as they raise progressively larger funds too…  

  24. Chris Grey

    Great chart and food for thought about the current environment. Another way to look at this is that maybe VCs should try to develop a higher ratio of wins to losses. Then they wouldn’t need to have the huge home runs of 20 to 100 times their investments to make up for all the bad deals.

  25. Rusty Williams

    The math you describe makes building a successful VC fund difficult, but in many ways VCs are the root of the cause.  How can anyone explain the pre-product, pre-customer valuation and funding of Color?  $41M as an initial round doesn’t make any sense unless they’re planning to build a new type of airplane engine.  You could blame the management but it’s not really their fault.  If the investors stuck to a more disciplined test, invest, refine, test, invest, refine approach, it would have been better for everyone. There are still VCs who pass on deals because they don’t see them as billion dollar, world-changing concepts.  The reality is that the best way to fund a billion dollar concept is to put money into a company that’s on that trajectory — not just pitching it.  In fact most of the examples of billion dollar companies (like Facebook, Google, Zynga and others) had good traction before they brought in really large rounds. It seems like the math could come back into alignment if VCs practiced some of the things you’ve been lobbying for: simplified terms, faster decisions, more smaller initial deals, and larger “homerun” deals when early metrics show that’s a reasonable probability.  With this approach, the rounds should look like this:Seed : angles or entrepreneurs self-fund a product idea to working prototype or better yet, a working service with some real customers/usersSeries A: VCs participate in more smaller rounds designed to assemble a core team and move to the point of real, and growing market traction.  Pre-val = $2M to $4M.  This should be large enough to fund 18 months of operation (as recommended by Mark).  If there isn’t tangible traction after this phase, then it’s time to move on  — either a very clear pivot, salvage sale, roll-up or shut down.  Don’t throw good money after bad.  Series B: round commensurate with the trajectory (this is where the billion dollar ambitions and valuation arm wrestling will still happen).This progression is really just another articulation of the lean start up philosophy.  We’re fortunate to be in an industry and era where the tools are cheap enough to go through these stages without a lot of capital.  If you want to build the next revolution in airplane engines, that’s another story.  Rusty

  26. writing jobs

    Very good post. It’s very helpful for me.

  27. Anand Kamannavar

    The math maybe simplified a bit. Hopefully the 1/3rd companies that go under take less money and are shutdown earlier and the 1/3rd companies that are home-runs take more money and return in good multiples on a larger net cash-in over multiple rounds. e.g. $5M company (Ser A) that is shut-down, vs. a $20M investment in multiple rounds (Series A-D) that returns net 5X (10X on A, and 3X on D) on the entire 20M. So the math can work-out.The harder part as a VC is to figure which one’s to continue funding and which one’s not to fund.

  28. Mark Essel

    Cut and dry. Valuations eating returns, demotivating investors.One caveat, startups won’t need follow on B and possibly C sized rounds if they control spending and can achieve sufficient break even revenue – 20 million is like an A, B, and C rolled up into one round. This also means startups that should have been closed down after an A round are eating up more investor capital.

  29. Georges van Hoegaerden

    Round sizes do not indicate risk, as you can see from my blog (“The economy is not the problem”) where I use Vinod’s quantification of the deflation of risk with the same money-in. And deflated risk equals deflated returns, hence the reason why subprime VC can only return subprime PE returns.The challenge for VCs is to not look at innovation like deals (or a commoditization of down-side risk), but treat them individually and each with their unique risk and funding requirements. But that assumes a GP who can assess upside risk (rather than money-in, downside) correctly and we are in short supply of GPs who can do that.The problem with innovation remains its arbitrage, not the lack of ideas that can produce great returns.Best,Georges 

  30. marshallyang

    I hate when entrepreneurs say they went to menlo park or boston.

  31. Rick Bullotta

    Two interesting forces at work here. First, I’ve noticed more than a few startups taking advantage of the elevated valuation climate to take more money than they need, rather than giving up less of the company.  When reality hits (whether in the aggregate or just for that specific startup), the founders/employees will find themselves in a world of hurt on a number of levels – on one end, sitting in line behind a boatload of preferred with liquidation preferences and on the other, having set an expectation “floor” for exit that might scare many potential acquirers away.  The high flyers won’t have this problem, but they’re flying in rare air anyway.The second force seems to be the VC industry itself.  It reminds me in some ways of the sports ownership, who are facing some interesting financial challenges of their own largely on the back of stratospheric payrolls. The salary creep (or spike) in pro sports is probably “stickier” than spikes in valuations, but still, those who are feeling the pain are the same ones who negotiated the very same mega contracts and revenue sharing deals that are biting them in the behind today.One has to think that this is all ultimately a self-correcting situation.  There will be winners and losers, there will be some who profit on the back of short term gains in companies with little or no long term value, and there will be hundreds of companies that die on the vine. Semper constans.

    1. Dave ML

      Sports ownership though has an underpinning of very scare resources for the fundamental asset that for the major sports will almost cetainly always have more buyers interested than there are teams to buy. To varying degrees, many teams in the NBA and MLB and (to a much lesser extent given higher TV revenues shared equally) the NFL may not do well cash flow wise, the team assets themselves have significant value outside of their cash flow. So ultimately, if the day to day cash flow price tag gets too high for a particular owner, the owner can always sell the asset and sell it generally at a profit.Right now there are too many companies, far more companies that there will be large exists and too many angels/microVCs/VCs investing at valuations that make it nearly impossible for them to make money. VC’s in particular are due for a reckoning, and seemingly in the early stagest of it as funds close, but it takes 5-10 years given fund cycles.  

      1. PhilipSugar

        Mark my words that era has ended in sports.

  32. Dave ML

    Given early stage valuations relative to likely exists, I have largely been sitting out angel investing recently. It has been too difficult to see a way to make money at many of the valuations that are getting thrown around.

    1. Dave ML

      of course it is “exits” not “exists”…sorry

  33. Michael

    Fred This is a great post. However, the VC business is not a business that works by the law of averages. It is an aberration business. I think you reference this in the comments below when you write that “if one deal does not return the fund” then the overall return will be challenged.Meritech and Greylock who invested in the now famous $500MM round in Facebook will make a lot of money on it. Same for DST at $10Bn.  KPCB and Sequoia who invested at close to $100MM pre money in Google did very well as well. This is without talking about our two funds.  That is aberration to the upside. And these returns tend to be concentrated in a handful of funds, yet another aberration.What does seem to be happening is that funders are mistaking companies with little chance to scale infinitely companies and entrepreneurs with nearly unlimited upside like Facebook or Twitter. So in the broad canvas of venture backed companies, valuation inflation in non-scaleable companies is catching froth from the great ones you are in like Twitter and Zynga. That, like you say, does not make for good math.Additionally, the flow of funds into late stage (even by early stage VC funds) is having the effect of driving up early stage valuations because the late stage money at high prices is available and the mark-up looks easy (maybe it is a “mark”). We know how this movie ends.

  34. William Mougayar

    This Bubble just got bigger, thanks to KPCB’s deep pockets, “KPCB, IVP Plow $32M into Shazam…So, from a music recognition app, it’s going to leapfrog to “dominate mobile discovery” and will become a TV app by the same stroke. Wow…and the day after tomorrow, we will see flying elephants all over the skies.”With the 150 millionth Shazamer just around the corner, Shazam is on a trajectory to achieve 250 million users within two years and continues to dominate the mobile discovery market.”That press release is full of hyperbolic assumptions that are stretched to the limit. It virtually made me sick to read it. Of course, they’ll need that much money to keep 100 employees on the payroll. I hope I’m wrong and they become a great company, and I’ll eat my words. In the meantime, I’m shaking my head.

    1. RichardF

      William, whilst I agree the press release is standard fodder I disagree with everything else you say.This is a B (or some might even say a C) round for Shazam.They have 150 million users! and are attracting 1 million new users a week.They have relationships with every major handset manufacturer in the world, which enables them to be on just about every handset, not just iPhone and Android.They are profitable.John Doerr has backed themPersonally I’m not sure about the tv tagging idea but Andrew Fisher is a smart guy who has built a smart team.They are swinging for the fences and I’m behind them all the way.  If I were Jeff Bezos I’d buy them now if I had the opportunity.

      1. William Mougayar

        There is a stretch and a hype that reminds me of a deja vu, e.g. “there’ll be 6 billion mobile users and we only have 3% of that”. Fisher came from Infospace who was the quintessential Internet bubble company, built on a house of cards. No wonder his message is very polished on raising the stakes. But fundamentally, I’m not sure if their model is defensible in the long term. The music/shopping discovery segment is very competitive and pretending they will own the 2nd device while watching TV by tricking consumers into more advertising consumption doesn’t seem very breakthrough-ish to me. 

        1. Dave W Baldwin

          @RichardForster:disqus Don’t know what valuation they used to gain that money, but if they’re trying to keep the long being independent and be on every handset no matter the shakeup happening in that industry, it may make sense.So they use the hyperbole to make it look like they’re the only thing.Do something with better customer attraction matched with lower OH and serve the people.

        2. RichardF

          Color raising $40m is bubble financing.Funding a company that has 150m downloads and is attracting 1m new customers a week is the hockey stick growth that VC’s like to back.  

          1. William Mougayar

            Agreed totally re: Color. Re: funding user growth – it all sounds good atthe high level and at the beginning, but one has to look at usage patterns,loyalty factors, and switching costs. It’s speculative to think that the skyis the limit once you have millions of users (most of them free) and thatyou can move them with you or monetize them no matter how you change yourbusiness model. Users could flee or stop using the app as fast as they came.

  35. Michael Anderson

    Who the hell would invest in a company at a Series A valuation anywhere near $20 million??I just sat in front of four credible startups (innovative product, management team and revenue) present today with valuations in the $2 to $3 million range.Certainly there is the 1/2 of 1% that might command an outrageous valuation, but it certainly isn’t the case across the board.

  36. Lloyd Fassett

    It’s interesting to me that entrepreneurs take the risk of losing it all by taking on a high early valuation.  Investors can spread their risk, but when other players can’t they frequently seem to take the biggest payoff, biggest risk path.  It seems irrational, but there it is.

  37. Elie Seidman

    Here’s a different way – different than valuations – to change the math. Instead of making the number 1000, make it 300. Then take the resources – both qualitative and quantitative – from the other 700 and focus them on making the 300 successful. The math changes a lot. We exist in a time of startups. We need to pivot a bit and focus more on finishups. 

    1. William Mougayar

      I like “finishups”. More elegant than exits.

    2. fredwilson

      finishups! i’m with you Elie

  38. Cangrande22

    make more $250m exits

  39. WoxFoo

    That actually makes a lot of sense when yout hink about

  40. John

    Here is a talk at the angel capital association meeting in Boston last December about early exits.

  41. Patrice Lamothe

    That’s a great post, which may actually explain why valuations are so high… and deserve to be.I think the key parameter here is the average exit value. Fred assumes the average exit valuation is around $250mm (“a good guess”). While it certainly is one of the best possible guess for a “standard portfolio” since Fred certainly has an excellent gut feeling for this, it probably does not include extreme outlayers such as Google and Facebook. However, VC portfolios are such that even a small probability to “hit” one of these case may completly change their profitability.Let’s just assume a Facebook-type exit happens every 10 years. It means that each of the 10.000 startups founded over 10 years has a theoretical 0.01% probability to reach a $100.000 mm exit value. As low at this probability may seem, it automatically generates $10 mm additionnal Expected Value for each of them.So if the average exit value of a Serie A start-up is $250 mm with a 5-10% hit rate (normal case) and $100.000 mm with a 0.01% hit rate (outlayer), its average exit value should be $22.5-35 mm, which makes for a much better investment case at current valuations!All in all, current market valuations could very well be a fair adjustment to the outsanding value created by 0.01% of the startups.

  42. Deepak Kapur

    I’m having difficulty with the logic. The valuations of the companies are happening today and $250 M average exit valuation are also happening today. But the companies getting funded now, for them to grow to have more than 100M valuation, they need be around for at least a few years (say 5 or more). Don’t you think the average valuation of exits will go up by then. Am I missing something?

  43. hotelmymood

    The other side of the chart isn’t shown: number of exits under $20 million. It’s a very large number, and don’t believe the hype that a higher valuation at the beginning is good for you.NYC Hotel Deals

  44. andyswan

    Seconded!  Preferred shares are handcuffs.  Don’t put them on too tight.  Too tight = “Hmmm I might be happy selling the whole company for this price right now”

  45. Guest

    Loved your comment Charlie. Want to add something just as an explicit reminder to readers regarding this comment you made.”And because valuation is LARGELY ARBITRARY, it simply doesn’t make sense to take the risk of a higher valuation.”You are talking about startup, tech valuations. Where the process of valuation has some analytical rigor although the resulting value might be arbitrary. However, there is a large body of work and research on classical valuation methodologies for existing, operating business post-startup phase that is not arbitrary.I was in valuation when the last bubble hit and it drove me nuts when confusion between  different industries and life cycles tries to be meshed and/or compared.  Have a great day everyone.

  46. Noam

    Well, founders may do better with the $20m post-moneyvaluation than the $10m.  If there was onlyone venture investment of $5m for example with an 8% preferred return, then theVC may have 50% = $10m of the $20m exit given a $10m post-money valuation, orthe higher of 25% = $5m or its preferred return of $5m + 8% on that compounded a few years given a $20m post-money valuation. Founders would generally be better off with a higher valuation ifthere’s only one round.A higher valuation could make future rounds more difficultif down rounds have stigma, but needn’t be a fight if the VC has simpleweighted-average antidilution protection.As an equity issuer, money raised held constant and assumingnon-participating simple preferred as you are, higher valuations are yourfriend.

  47. ErikSchwartz

    I was about to write all this. I totally concur. You take a big round really early you limit options. 

  48. Guest

    Interesting comment regarding the “2” Charlie.

  49. bernardlunn

    There are regulars and occasional casual drop-ins like me, who hope to not upset the regulars by jumping into conversations too awkwardly

  50. reece

    there’s a bunch of us… some comment daily, some (like me) just jump in when i’ve got something to say.what’s fun is meeting people from the AVC community offline… i’ve met a bunch lately. all good folks.

  51. ShanaC

    personal guess from keeping lists – I get the feeling that there is 50ish really regular and another 200ish who pop in more occassionally.

  52. Donna Brewington White

    @reecepacheco:disqus I too have had the pleasure of meeting some AVC’ers offline recently.  What struck me is how consistent everyone is with their online persona which says a lot for the transparency and authenticity of this group.Except one was about 20 years younger than I imagined, but still the same otherwise.(sorry Paul — had to respond to your comment since there wasn’t a response button available for Reece’s comment.)

  53. Noam

    Well, no 🙂  Investment amount and non-valuation terms held constant, you seemed to suggest a lower early valuation is better.  I disagreed.  Your “Question 3” supposes that double the valuation means double the capital raised.  If that’s true, then of course there’s a higher hurdle for founders to exit profitably, but there’s also double the money for founders and other employees to grow the company or take salary.  The point stands that investment amount and non-valuation terms held constant, equity issuers may generally do better with a higher valuation, not a lower one.

  54. JamesHRH

    mark suggested ‘high side of normal’ recently – made common sense and business sense.