It’s easy to be blinded by headlines announcing startup exits and IPOs, sharing stories of visionary CEOs who made it and employees who turned into millionaires. These anecdotes help fuel the startup dream despite many heartbreaking stories in our industry, and perhaps that’s a good thing. But in the finance world, we deal with facts, not fantasies. That’s why we’ve gathered interesting information on 19 startup IPOs and exits from the past decade and particularly the past couple of years. Here’s what our data diving session revealed.
5 Data-Driven Financial Lessons to Learn
- The Road to Success Can Be a Long and Tedious One
It may take a long while before the company reaches a liquidity event like an IPO or acquisition. Our data shows that the average time from founding to liquidity is 10.47 years, a substantial period that not every employee or investor would be willing to wait. It’s worth noting that the wait gets shorter for companies that grow and raise substantial funding faster. From Round C to liquidity, the average time was five years. In addition, nearly a third of the companies we tracked didn’t raise a Round D at all, and only 26% raised a Round E.
External data shows that startups have a one in 10 shot at being acquired after raising Series C funding. Funding is a good indicator for the company’s chances of reaching the ultimate financial goals, but you should always ask yourself if you’re willing to be patient and whether or not your short- and long-term financial plans justify waiting.
- You Only Read About Success
Celebrating success is terrific, and who doesn’t love a good victory tale? But the startup arena is more than familiar with the idea of failure. 90% of startups fail, with more than 20% shutting down within a year. Between the years 2012-2017, more than 3,000 Israeli startups had to give up on their dream. According to Crunchbase, only 26% of seed-funded startups reach a Series B, and the rest fail despite having raised pre-seed or Series A funding, which can sometimes reach substantial amounts.
For every entrepreneur celebrating with champagne bottles, several others face a harsh reality. Sometimes, positive headlines hide less impressive results. In 2019, information security company Nyotron technically reached an exit when it was sold for $15.6 million. But the actual background story is that the startup didn’t manage to generate a positive ROI after raising more than $40 million over the years.
- You Should Secure Every Valuation Rise
When companies raise funding on their way to a liquidity event, the rise in valuation may work against option holders. Investors could find the new valuation unrealistic or intimidating and worry about the company’s ability to reach new heights, limiting the market opportunities, such as secondary deals, options exercise funding deals or equity liquidation deals that can be offered to holders. In addition, and under the risky environment described above, as long the valuation is “on-paper” only – nothing is guaranteed. Founders, investors, and employees who realize this may sell some of their shares post-funding rounds, sometimes early in the company’s lifecycle. This helps secure the value, enabling option holders to capitalize on the value and minimize the risk.
Secondary deals, which sometimes also generate a raise in valuation by themselves, occur during different stages. Some founders and employees in companies, like eToro or IronSource, make secondary deals after multiple traditional funding rounds. In Others, like Orca or Atera, secondaries happen much earlier, during their B Series funding.
- High Valuations Can Be Risky
The startup ecosystem loves unicorns, but these legendary creatures (who became pretty standard recently) must continue to climb up the valuation ladder and reach massive profit margins to achieve this goal. Slack, for example, went public in 2019 at a $23.25 billion valuation and generates around $1 billion annually. SaaS Companies that went public based on a $3 billion valuation will have to reach $250-300 million in sales to justify this number, a difficult task that could force them to triple their sales efforts.
- The Public Trades Differently Than Investors
When private companies raise funding, their valuation is derived from the technology ecosystem, tied to led by Venture Capital funds’ epetite and other startup companies’ funding and valuations. It can be slightly or completely disconnected from the company’s actual sales or market dominance. For public companies, it’s an entirely different story.
The free market responds differently than private investors. Rapid growth may not win the race, while slow and steady business activity can guarantee the stock’s value. We’ve seen enough examples for companies that suffered a drop in value post IPO for different reasons. In fact, 62.5% of the companies we examined had gone through a value drop, while 46.2% of them experienced this negative milestone right after going public. The list includes companies like Amwell, Tufin, IronSource, Payoneer, Jfrog, and others. One noteworthy example is that of Hippo, the insurtech company that went public via a SPAC merger and lost half its value within a couple of weeks.
It’s essential to stay alert and actively manage your financial assets, including options and equity. As an employee, you can harness your knowledge of the company to make informed decisions and base your move on your financial goals. Examine the company’s financial history and the valuation, but remember that the plain numbers don’t always reveal everything.
