A study of 96,000 startups and 167,000 VC funding rounds over the last 30 years shows that 88% of VC-funded founders end up with no exit value. Zero.
That’s a $0 payoff for 80,000 VC-funded founders after years of building products, raising money, and growing teams.
This data comes from a paper by economists examining the potential impacts of taxing unrealized (paper) gains in founder wealth as you build, not just at exit.
The 88% number isn’t big news or even surprising. VCs have been saying this out loud for years.
A VC places 20 bets from a fund and expects 1 or 2 companies to pay off big enough to cover all their losses (aka founders with zero).
A billion-dollar VC fund needs several billion-dollar exits to get to its 5X return goal.
Founders who raise VC funding (then and now) bet their company and their life on a prize that happens about 10% of the time.
It usually doesn’t work, but it can. That’s why VC funding exists. It’s called “venture” for a reason.
Two reasons founders get zeroed on exit values that haven’t changed in 30 years:
1) About half of VC-funded companies just fail. We tried, and it didn’t work. Shut it down or put it out to pasture.
So when a founder says, “VCs don’t risk anything when they invest in an up-and-running company,” this isn’t true.
2) When a company raises $20M and sells for $40M, VCs take home all that prize with their liquidation preferences in their preferred shares. VCs get risk protection on downside exits.
A 2X exit isn’t a win for VCs, but it usually wipes out founders and employees with common stock.
This is the Power Law at work. 10% win, and 1% win very big. It’s all about the 1%.
Most VCs say that the Power Law is even bigger in the AI age. More bets, more busts. Much rarer but hugely bigger wins. That’s the current game.
Here are a few other findings this study uncovered:
– The top 2% of founders capture 80% of the total exit value, and the top 1% account for 45%.
– The median exit value is $44 million, and the average is $258 million. Big wins skew the average, but most exits are under $100 million.
– Just over 600 VC-backed companies have exited for over $1B in the last 30 years.
VCs aren’t bad or evil. They are deploying risk capital (with downside protection) in a very risky game.
It’s just much riskier for founders than for the VCs.
Most founders understand the VC math more than they did 5 years ago during the COVID boom when it was “easy to raise.” Ouch.
But let’s remember that the clapping we hear about a big venture capital funding round is always a little early. It’s a dangerous drug, just looking at this math.
Here’s a link to the study, which explains what happens to founders and innovation when you tax unrealized gains. (It isn’t good.) https://lnkd.in/g7AxT8yF
