Understanding the journey to a successful exit requires patience, strategy, and a deep awareness of the factors that can extend the timeline far beyond initial expectations.
With only a tiny percentage of early-stage companies achieving a meaningful exit within the first five years, the path to success is often longer and more complex than founders anticipate.
Peter Walker, Head of Insights at Carta, recently analysed the startup class of 2018, providing a clear snapshot of the state of these tech startups over a six-year period. The analysis, which includes 3,067 U.S. startups that used Carta as their cap table provider, reveals that only a tiny percentage have achieved significant exits through acquisitions or IPOs. Meanwhile, a large portion either remains in the early stages of development or has shut down altogether. These findings offer data-driven insights into the outcomes of early-stage startups during their first six years.
Overall Status:
- 45% of the startups are still ongoing.
- 49% have shut down.
- 5% have been acquired although some of these acquisitions may be for a very small amount and others might be classed as ‘acquihires’ where acquirers are seeking talented teams and not necessarily the startup’s product or technology.
- 0.2% have gone public (IPO).
Progress by Funding Stage:
- 38% remain in the Pre-Seed stage, with limited visibility into their exact status. Pre-seed means they have yet to raise any priced round, though some have raised capital on SAFEs or Convertible Notes.
- 24% advanced to a priced Seed round, where most acquisitions occur.
- 25% reached Series A, which is the largest group of ongoing companies.
- 10% have raised a Series B, with some IPOs occurring at this stage.
- Only 3.2% progressed to Series C.
- A mere 0.7% made it to Series D or beyond.
That does sound quite challenging, and it is. However, it also underscores the need to plan for the long term. Some of the best “exits” didn’t receive strong M&A offers in the first five years, and several promising deals fell through. It’s important to remain optimistic and understand that the real value of your startup may be realised in years 6-10 or beyond.
In the article below, written by the team at Déjà Partners, we explore what Walker’s analysis means for startup founders and why it takes so long for many to achieve a meaningful exit.
- Market Maturation and Timing:
- Industry Cycles: Certain sectors, like biotech or fintech, often require extended periods to reach maturation due to regulatory requirements, extensive R&D cycles, and slower adoption rates.
- Timing the Exit: Startups must align their exit with favourable market conditions. An acquisition or IPO might be delayed if the market is not ripe, even if the company is ready.
- Product-Market Fit and Scaling:
- Achieving Product-Market Fit: A significant amount of time is spent iterating the product to achieve a perfect market fit. This process can take years, especially in highly competitive markets where consumer needs are constantly evolving.
- Scaling Challenges: Even after achieving product-market fit, scaling the business to a level where it becomes attractive for acquisition or IPO takes considerable time. This includes building robust operations, expanding customer bases, and achieving consistent revenue growth.
- Fundraising and Investor Expectations:
- Investor Milestones: Each fundraising round sets higher expectations and milestones. Founders often face pressure to meet these milestones, which can extend the timeline to an exit.
- Valuation and Dilution: Founders might delay an exit to achieve a higher valuation, especially if earlier rounds have resulted in significant dilution of their ownership stake.
- Competitive Landscape:
- Market Saturation: In crowded markets, differentiation becomes crucial, and companies may take longer to establish a unique value proposition that makes them stand out to potential acquirers.
- Acquisition Targets: Larger companies may take time to identify and vet acquisition targets, especially in rapidly evolving industries. This can delay potential exits for startups.
Providing Guidance: A Roadmap for Founders
Given these challenges, what can founders do to navigate the long journey to a meaningful exit?
- Build for Long-Term Value:
- Focus on Sustainable Growth: Rather than chasing short-term metrics, focus on building a business with long-term value. This includes creating a strong company culture, developing a loyal customer base, and ensuring financial stability.
- Diversify Revenue Streams: Avoid over-reliance on a single product or customer. Diversifying revenue streams can make the company more resilient and attractive to potential buyers.
- Strategic Fundraising:
- Choose Investors Wisely: Partner with investors who share your vision and have experience guiding companies through the exit process. Their networks and expertise can be invaluable.
- Plan for Exit Early: From the first fundraising round, consider your exit strategy. Understand the implications of each funding round on your timeline and control over the company.
- Timing and Market Awareness:
- Monitor Market Conditions: Keep a close eye on market trends and be ready to act when conditions are favourable for an exit. This may involve pausing expansion plans to wait for a better opportunity.
- Be Flexible: The path to an exit may not be linear. Be prepared to pivot your strategy based on market feedback and opportunities.
- Stay Resilient:
- Endurance: Understand that the journey to a meaningful exit is often long and fraught with challenges. Staying resilient and maintaining a clear vision will help guide your company through difficult times.
- Adaptability: The ability to adapt to changing circumstances is crucial. This might mean altering your product, target market, or even your exit strategy as you gather more data and insights.
Conclusion
Peter Walker’s analysis of the startup class of 2018 provides a valuable lens through which we can understand the challenges startups face on their journey to a meaningful exit. By extending this analysis and focusing on the reasons behind these long timelines, we can provide founders with practical guidance on how to navigate the complex and often lengthy road to realising the full value of their startups.
With the right strategies and mindset, founders can not only improve their chances of a successful exit but also create lasting value in the process.
Thanks for reading.
How We Help Entrepreneurs
Our mission at Déjà Partners is to empower and support the best entrepreneurs and early stage companies. We understand the challenges and risks involved in starting a new business from scratch and are dedicated to providing mentorship, guidance, and support to help you succeed. Our services are offered on a pro bono basis, meaning there’s no upfront financial cost to you. Our philosophy of alignment of interests mandates that our ultimate compensation is tied to the success of the startup company through an allocation of stock options.
We begin by working closely with you to prepare for a successful fundraising with institutional investors or debt providers. Drawing on our wealth of experience in building businesses, we provide valuable insights and feedback to help you refine your business plan and pitch. With our guidance, you’ll be well-positioned to attract the right investors and secure the funding you need to bring your vision to life.
But our support doesn’t end there. We’re committed to helping you navigate the challenges of scaling your business to create value and achieve your goals over the long-term. As seasoned entrepreneurs ourselves, we understand the highs and lows of building a business and can provide valuable advice and support along the way. Our goal is to help you mitigate against the prospect of failure so that you can approach your business journey with growing confidence and optimism.
At Déjà Partners, we’re passionate about helping entrepreneurs turn their visions into successful businesses. Contact us today to learn more about how we can help you achieve your goals.