This is one of the trickiest questions for entrepreneurs and their funding partners, but is always in the back of everyone’s mind especially once external funding comes into play. The company needs time to prove itself and build value (and maybe even to pivot), but leave it too long…
We are going to try and answer this question based on Techcrunch’s funding data from around 15,600 U.S.-based technology companies founded between 2003 and 2013. Let’s first take a look at the survival curve and just how steep the drop-off is.
The steep startup survival curve
Around 60 percent of companies that raise Pre-Series A funding (e.g. a Seed or Angel round, a convertible note or equity crowd-funding round) fail to make it to Series A or beyond.
There are several reasons why companies stop raising money. Some achieve financial sustainability, others close up shop and still others find an exit through acquisition or going public. In the Techcrunch data set, there were more than 16 times as many companies that took the acquisition path compared to going public.
When do most companies get acquired?
Intuition might suggest it’s when the stock in that company is the least expensive, so acquisitions are likely to happen at a relatively early stage. But just how early?
The proportion of the total startup population that end up getting acquired reaches 16 percent by the Series E stage, with only the slightest variation after that. Ultimately roughly one in six companies in the Techcrunch data set ended up being acquired (to date).
More than 50% of these are acquired at the Pre-Series A stage and a further 25% are acquired during the Series A stage. A company that gets to Series C has less than 10% chance of being acquired.
Rather earlier than later
The cause of the very steep drop-off in the population of early-stage startups is complicated, but if one thing is clear, it’s that most of the exit opportunities come early, as do the primary causes of startup failure. Team breakups, running out of capital before finding product-market fit, failing to scale, simple bad luck and plenty of other company-killing pitfalls are just more prevalent when startups are, well, starting up.
Out of all the things that make starting a successful company difficult, the steep curve of startup survival through the fundraising process might be one of the most significant. So if your company isn’t too far down the alphabet of VC funding rounds and you’re having a hard time finding a path out of the woods, exit if and while you can. You won’t be alone in doing so.
Credit: Techcrunch May 17, 2017