David Cummings on Startups

Possible Outcomes for a Venture-Backed Startup

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David Cummings

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There’s been a small meme for a while now that too much congratulations is bestowed on entrepreneurs for raising money from investors. The idea is that raising money is glorified to a level greater than that of building a successful business when in reality most funded startups still fail. When raising money, especially venture money, the possible outcomes for the startup are limited to a few scenarios, typically in a 3-10 year time horizon:

  • Positive exit – get acquired by another company for substantially more than the amount raised
  • Negative exit – an asset or fire sale where the company is sold for less than the amount raised or a complete shut down of the business
  • IPO – also a positive exit but done via providing liquidity to shareholders through the public markets

Note that it’s very limited: the venture investors need to return either cash or public stock to their limited partners. Once a startup raises institutional money, their ability to be small-to-medium sized long-term business goes away. Their ability to be a family business goes away. Their ability to do things outside of provide cash or public equities in a sub 10-year horizon goes away. This isn’t necessarily a bad thing but it’s important for entrepreneurs to think through these possible outcomes when raising money.

What else? What are your thoughts on these possible outcomes for venture-backed startups?

Comments

3 responses to “Possible Outcomes for a Venture-Backed Startup”

  1. Sahil Parikh (@sahilparikh) Avatar
    Sahil Parikh (@sahilparikh)

    Good points! Extremely important for the entrepreneur to know what he/she wants the business to become. People somehow thing that raising money is their passport to success.

    Reply
  2. Johnson Cook Avatar
    Johnson Cook

    Thanks for the reminder that: “The idea is that raising money is glorified to a level greater than that of building a successful business when in reality most funded startups still fail. ” … I think we all know in our gut that we need to be focused on generating cash flow and profits while providing value that improves society. Raising money is not “the goal” of entrepreneurship.

    Reply
  3. Jamie Bardin Avatar
    Jamie Bardin

    David — as always good comments. While you have 3 outcomes listed, I would note that there are a couple of more to think about…in addition to Positive, Negative, and IPO there is “going concern” that throws off cash or consumes none, but might not have an exit opportunity as well as “mildy positive” as opposed to “…substantially more.” Typically, I have heard these levels referred to as Home Run (IPO, huge sale), triple, double, single and strike out (negative to liquidation). I would also pose that the “going concern” is actually one of the worst outcomes for the entrepreneur in that there is no exit in sight, and you might not make a lot along the way (the average comp in SV for a CEO of a going concern is about $250K annually, give or take) so you can burn a lot of time up in your life hanging on. Secondly, there are ways to raise capital and stay in control arguably driven by how you scale before you do it…

    I remember the go go days of the bubble, when all anyone talked about was the amount they had raised, mostly because they had no revenue to talk about. One of the key positive outcomes of raising a lot of money is that if deployed properly, he who raises the most has a better chance of winning…

    Reply

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