Updated: The relationship between exit value, money invested and how well the founders make out

By June 30, 2010Uncategorized

The following stats show exit values as a multiple of the amount of venture capital invested.  I got the data from Andrew Romans of the Founders Club.

Due to liquidation preferences you can expect that if the exit is less than or equal to the amount of capital invested the founders won’t have made much money.  It is common practice in these downside scenarios to do a deal which incentivises management to execute on a low value exit, so the founders will typically get something, but it will certainly be below early expectations.  Clearly the VC hasn’t done very well here either.

If the exit is in the 1-4x capital invested range then the founders can expect to receive cash in the neighbourhood of the paper value of their shares when the VC invested.  This follows from the very rough rule of thumb that in a typical VC round the investor gets one third of the company for her money.  In this scenario the VC has probably made a small profit, but not enough to get excited by.

Then when the exits get to be 4x+ the money invested the founders start to do very nicely.

The upshot of all this is that with the benefit of hindsight we can see that in 2007 of the deals that exited the decision to raise venture capital was a good one 41% of the time and in 2008 the figure was 45%61% of the time and in 2008 that figure dropped to 40% (updated, first time round I erroneously added the numbers of deals instead of the percentages).

If you take the standard venture capital model which looks for one third of the portfolio to be winners and you factor in the fact that a good portion of companies never really exit this figure feels about right.  If it was much higher it would suggest that VCs weren’t taking enough risk, and if it was much lower there would be legitimate questions as to whether the venture capital industry was delivering any benefit to entrepreneurs, and we probably wouldn’t be making acceptable returns for our investors.

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  • The relative mix is kind of even between the different groups. Not sure what the big takeaways are. What do you think?

  • Good point, thanks. I've updated the post to make my point clearer.

  • Any chance of uploading a different screenshot (different file format) as I cannot view the .bmp image

  • I'm actually fairly impressed to see that more than 40% of deals exit at 4x or more both in 07 and 08. It seems like a good number to me.

    A quick comment regarding those numbers though. It's not 61% and 40% of the time but 61 out of 150 and 40 out of 87. I think you've added the absolute numbers instead of the % 😉

    Also, I find interesting to see that the number of deals plummeted between 07 and 08, from 150 to 87. What do you think of that ?

    Thanks for sharing!

  • Thanks for pointing out the mistake Benoit, now updated.

    A large part of the decline in deals from 2007 to 2008 can be explained by the financial crisis that hit in the summer of 2008 and declining confidence amongst acquirers in the first half of the year ahead of the collapse.

  • Hi James – sorry about that – do my images usually render OK?

    I am having problems with my regular blog editor at the moment wrote this post direct from WordPress, which might have caused a change. I will see if I can change the .bmp to a .jpg.

  • Hi James – changed to a PNG file, which is consistent with my usual image format. Let me know if you still have problems and thanks for pointing out the change.

  • Hi Nick, I normally read on a Windows PC so have never noticed the .bmp images before as they render fine; only noticed when using OSX the other day. Thanks.

  • These numbers really got me thinking. They look surprisingly good. Do you know what kind of deals went into the data? UK deals? US deals? And, more importantly: You seem to have used M&A data. Does that mean liquidation does not qualify as an exit in this context?

  • Hi Christian. You raise some good questions. I suspect that liquidations are excluded, as are deals where terms are not disclosed. If I think about our experience my guess is that companies falling into these categories might make up 20-30% of the enlarged total.

    The data was prepared by Andrew Romans and I will put your questions to him.

  • Andrew Romans

    Nic Brisbourne asked me about the source of the data. I have more research on this topic including IPO data. The source is listed on each slide. for the data Nic published:

    Source: Thomson Reuters & National Venture Capital Association *Only accounts for deals with disclosed values
    ** Includes all companies with at least one U.S. VC Investor that trade on U.S. exchanges, regardless of domicile

    So this is mostly US vc backed companies plus all the Euro and Israeli companies that become American companies prior to exit like MySQL, etc.

    Note that only one third to 50% of exits are disclosed from 2002 through to 2008. I do know founders that made millions on undisclosed exits, but for the purpose of my research one can assume that they are not making anything or very little. Like Nic mentions a 10% carve out / management incentive plan falls below what most hoped for, but it is something and this helps the VCs get something back to push closer to getting into carry. Also keeps the relationship alive between VC and entrepreneur making a working relationship hopefully survive to the next deal.

    The two take aways here are 1) more founders and VC backed entrepreneurs fail than most seem to think. 2) more entrepreneurs are making 10x exits than one might think. One must give these percentages a hair cut when you consider this is “disclosed exits” only and that is only 33-50% of the M&A deals. IPO data also attached.

    It is hard to get good data for Europe, but in general European companies raise less cash than US VC backed companies. The costs of running a business in the UK and expanding beyond the UK are much higher than the US. Exits in the US are higher than Europe too. So the true data in Europe would not be as bright at these US figures.

    Andrew Romans, General Partner, The Founders Club

  • Andrew Romans

    the big takeways are: 1) more VC backed entrepreneurs making zero than most people think and 2) more VC backed entrepreneurs make a big fortune than most people think. it is a game of extreme winners and losers….much the way I view the VCs also. Most VCs in Europe will never see carry and they will never return the fund. if they do it will take a long, long time and may be small. In contrast a few VCs, mostly in the US do get into carry and they make a lot of dinero!

  • Great. Thanks for the extra background info. Cheers.

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