In the subset of Unicorns that have exited over the past decade, investors realized less than a 10X return in a majority (62%) of the financings in those companies.
Our industry has become obsessed with Unicorns — those companies in our portfolios that reach a valuation of $1 billion or greater. Indeed, it’s an impressive feat for a venture-funded company to reach this high of a valuation. However, I believe we’re shooting at the wrong target…
Ultimately the interim, or even ultimate, valuation of venture-funded companies is not what matters. It is the cash-on-cash multiples and IRRs that we realize on our investments.
I’d propose a different definition of winner to put up on the pedestal and celebrate. I’ve dubbed these winners “Triple Crowns”. Triple Crowns are financings which meet all three of these conditions:
1. Realized a cash-on-cash multiple of at least 10X, and
2. Realized an IRR of at least 100%, and
3. VCs invested at least $1M.
Triple Crowns are even more rare than Unicorns. At Correlation Ventures, we’ve built and analyzed what we believe is the industry’s most complete and accurate database of U.S. venture capital financings and their outcomes. Of the 17,432 venture financings in our database in companies that have exited since 2006, approximately 3% were in Unicorns while only 2% were Triple Crowns. For the purpose of this note, a Unicorn is defined as any company which reached a $1B valuation at any point in their history, adjusted for inflation (2015 dollars).
Perhaps the most surprising fact that our research uncovered is how little overlap there has been is between the two groups:
- Almost three quarters (72%) of all Triple Crowns were not in Unicorns, and
- 83% of the financings in Unicorns were not Triple Crowns (in fact, only 38% of Unicorns had even one financing that was a Triple Crown).
The celebration of large unrealized company valuations has, I believe, contributed to some unhealthy trends in our industry. For example, VCs may be tempted to pay higher prices and invest in later stages in order to be able to highlight a Unicorn on their web sites. In addition, entrepreneurs may focus on the wrong bullseye, such as achieving higher company valuations rather than higher returns. It’s perhaps no accident that both valuations and later stage investments have skyrocketed in U.S. venture in recent years. Ultimately, these trends contribute to lower returns for our industry overall.
My hope is that a re-focus on realized returns by financing round will help us return to more capital- efficient investing and management. Shouldn’t we celebrate the entrepreneurs and VCs, for example, in an investment that generates a 15X return on a $200M exit more than we do an investment in a Unicorn that generates a 2X return?
I find it fitting that unicorns are mythical creatures while the Triple Crown is real. Unicorns are overrated. Triple Crowns are better.
If you are entrepreneur raising or working with a team that is closing a round, we would value any introductions where we might be helpful as a co-investor.
Correlation Ventures is the predictive analytics pioneer in the venture capital industry and the industry’s leading co-investor. With more than $350 million under management, we’re one of the most active U.S. venture investors, investing in about two to three new investments a month. Over the last five years, we’ve invested in over 140 companies. Correlation offers a dramatically better option for lead investors, syndicates, and companies seeking additional venture capital to fill out a round. We offer the most rapid, convenient, and reliable source of co‐investment capital in the industry; for example, committing to make investment decisions within two weeks or less. Correlation is backed by leading institutional investors.