My idle thoughts on tech startups
Grim statistics & what they mean for all of us
The NVCA released figures today (slides embedded below courtesty of NVCA, also reported here) on the grim state of the exit market for VC-backed startups. The cold statistics are pretty sobering… Q2 2008 was the first quarter in 30yrs that no VC-backed company went public and there have been only 5 the whole first half of the year. The M&A numbers are no better either, down nearly 20% over the same period last year and similarly had a big drop in Q2.
I imagine not many folks (besides perhaps our LP investors) will shed tears for the challenging exit environment us VCs currently face. But the reality is that these are symptoms which impact the entire startup ecosystem… VCs, entrepreneurs, and large tech companies (who rely in part on startup M&A to fuel innovation) alike. And of course there’s a very real impact on the broader economy since companies that began as VC-backed startups account for nearly 20% of GDP today (think Microsoft, Starbucks, Google, FedEx). If you dig into the raw numbers there are several implications for all of us.
1) It’s taking longer to reach an exit of any sort. The median time from initial funding to liquidity has been growing steadily since the tech crash of 2000-2001. But now in 2008 it has jumped sharply from 6.4yrs (based on 2007 exits) to now over 7yrs. We all need to prepare financially, mentally, and strategically for longer periods of company building.
2) The median exit value for VC-backed startups is lower. While the averages jump around due to a handful of very large exits, the median exit value has hovered around $100M for awhile (it was $93M for ’07 exits) but it has dropped to $63M thus far in 2008. While entrepreneurs and VCs alike are all shooting to build large, enduring companies ultimately we can’t all be above average and capital efficiency may become more critical if lower exit values persist in the long run.
3) Exit activity, both IPO and acquisition, has dropped across all sectors. There are some variations between life sciences and IT, and of course cleantech is still a relatively “new” sector (i.e. lots of investment in recent yrs, comparatively few exits yet). But unlike at the beginning of this decade, when liquidity issues were largely confined to internet and telecom sectors, this exit environment has impact across the board.
So what’s the point of all this? Believe it or not, I remain very optimistic about the vibrancy of exit opportunities and the investing climate for tech startups broadly. The best startups are responding to the current reality with various approaches that may ultimately allow them to reach even greater scale. And the greatest innovations are likely to remain the purvue of startups rather than big companies. But all of us in the startup ecosystem must be cognizant of the exit markets today and make sure we are well prepared to thrive in this environment.