A startup’s job is to move fast and make things. If it takes outside investment from venture capitalists, it’s also under the mandate to grow quickly and eventually find an exit. After all, they have investors to answer to.
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For VCs, eventual liquidity arrives through one of several routes. If a company that they’ve backed stays private for a while, early investors may opt to cash out their stakes through the secondary market, or through a tender offer from a deep-pocketed buyer further up the capital stack. For example, in January 2018, SoftBank and a consortium of other investors bought up $9 billion worth of Uber shares from employees and early investors. However, not all startups get the same attention as Uber did. And because these transactions involve private company shares, they’re rarely disclosed.
The most visible and direct ways startup stakeholders (which include investors, founders, and stock-holding employees) get liquidity are through one of two exit paths. In a merger or acquisition (M&A), the acquiring company purchases the shares of a startup, typically with cash or stock. In the case of an initial public offering (IPO) or direct listing, a company transitions from being privately held to publicly traded, subjecting itself to additional regulatory scrutiny and the whims of retail and institutional traders.
Although every company is unique, they’re still subject to local market conditions. The amount of time between startup founding and exit via IPO or M&A varies by geography. Using a set of several thousand venture-backed startups from around the world, we found that the time to exit varies substantially.
The VC Timeline
Once a company takes outside financing from VCs, the clock is ticking. At least in the U.S., most venture capital funds operate on a ten year timeline. There are plenty of exceptions and contractual clauses which could serve to extend or reduce a particular fund’s cycle, but in general it goes something like this.
Out of a brand new fund, a firm might spend the first one to three years writing new checks. General partners and their associates spend the next several years helping to grow their new crop of portfolio companies (and writing follow-on checks) while serving governance, risk management, and advisory roles through board directorships. And then they spend the last couple years harvesting capital gains and passing those returns back to limited partners, skimming some of the profits for general partners’ customary carried interest.
Accordingly, the lifecycle of venture capital funds sets the cadence for their portfolio startups.
Continental Differences In Time From Inception To Exit
In the chart below, we plot the average and median time elapsed between a company’s founding date and the date on which it went public or was acquired. We used a relatively constrained dataset, following a similar methodology to last year’s analysis of valuation multiples. We limited ourselves to companies which raised, at minimum, pre-Series A (pre-seed, seed, angel financing, or convertible notes) or a Series A round. However, companies which were not venture-backed, whose known funding histories start at Series B or later, and companies with large gaps in their funding histories were excluded.1
You’ll notice that the sample sizes, shown in parentheses, vary considerably. Averages also vary quite a bit. Especially with small sample sizes, outliers (in this case, companies which took an extremely long time, or an extremely short time to find an exit) can skew an average.
However, a general trend emerges: the startup lifecycle is slightly longer in developed economies, as compared to emerging economies. While there was insufficient data to establish whether emerging economies produced better multiples on invested capital (calculated by dividing the terminal valuation at exit by the amount of equity funding raised). Prior analysis by Crunchbase News indicates that companies which exit early (both in terms of fundraising ‘stage’ and time in the market) generated better multiples on invested capital (MOIC). Other analysis we did shows that companies which raise less capital generally produce better MOICs than comparatively more VC cash-laden counterparts.
What Is Driving This Trend?
What might be driving the difference in time to exit from continent to continent? It’s tough to say for sure, just looking at the numbers. However, here are some possibilities.
It’s impossible to rule out that this is an artifact of sampling bias. Since the startup scenes in places like the U.S. and in European countries that are well-represented in our filtered dataset are more established, there are more companies which have spent more time in the market by the time they get acquired or go public. In South America, and Brazil in particular, the venture-backed startup model is a relatively recent phenomenon. The average age of all operating, privately-held companies is likely younger in emerging markets, and that might bias our results.
It’s possible that more robust venture capital markets in developed economies enable companies to remain private for longer periods of time. This is certainly the case with the IPO market. A recent surge of late-stage VC and PE investment is able to deliver IPO-scale capital without the regulatory burden and market risks of actually going public. But the ability to continuously raise capital might also extend the M&A timeline as well. With more risk capital available to help businesses grow independently, there’s less of an impetus to fold into a bigger corporation through M&A.
No doubt there are plenty of other explanations for this high-level trend. Drilling down on a country-by-country basis is likely to surface even more idiosyncrasies. One country might have more relaxed regulations on public offerings, for example, while another could maintain stricter oversight of M&A transactions. But, broadly, our data suggest a difference, albeit slight, between continents home to mostly developed economies versus those with primarily emerging economies.
Folks live fast in the venture economy, but it seems like some are faster than others.
Illustration: Li-Anne Dias
We originally set out to find median exit multiples by country, but there was insufficient data outside the U.S. to make analytically rigorous claims about international markets. So we instead opted to look at the time to exit.↩