Startup Fundraising: The Crazy Startup Madness
By Danny Holtschke from StartupGeist
Many entrepreneurs, and the venture investors who back them seek to build big, impactful companies valued at a billion dollars. They are called ‘Unicorns’.
Historically, venture capitalists return the money they invest in startups, with only a few of their many investments they do per fund.
The reason is the Power Law.
80/20 Summary
What is the power law?
As Paul Graham outlined in 2012:
The first rule I knew intellectually, but didn’t really grasp till it happened to us. The total value of the companies we’ve funded is around 10 billion, give or take a few. But just two companies, Dropbox and Airbnb, account for about three quarters of it.
He updates the power law distribution of YC’s investments in 2013:
Y Combinator has now funded 564 startups including the current batch. The total valuation of the 287 that have valuations (either by raising an equity round, getting acquired, or dying) is about $11.7 billion. As usual those numbers are dominated by a few big winners. The top 10 startups account for 8.6 of that 11.7 billion.
That’s 73.5%.
10 startups out of 564 investments stand for 74% of the total valuation of YC’s startups. He doesn’t outline how much of the 11.7 billion total valuation of YC’s startups is made of by AirBnB and Dropbox. But it’s sure to assume that they stand for a massive chunk — further highlighting the power law in startup investments.
What does this mean for investors?
An example.
To return the initial capital of a $400 million venture fund, investors need to own 20 percent of two different $1 billion companies at exit, or 20 percent of a $2 billion company when the company is acquired or goes public.
Not going deeper here: Just remember that there are eight to 10 unicorns per decade and successful investors need to be part of one of them!
What does this mean for your startup ambitions?
Let’s adjust your expectations about startup valuations, raising money and the probability to raise venture capital for your startup.
Recent research reveals that only 0.14% of all venture capital funded startups reach a billion dollar valuation. That’s the ‘Unicorn-Club’ all ambitious startup founders want to belong to.
Your chance to become a member? Well — very very small.
As outlined in the beginning, there are eight to ten unicorns created every decade — while thousands of startups end up in the cemetery.
Not all companies are startups
In the U.S. 600,000 companies are started each year. Not all companies are startups, but for the sake of showing your likelihood to receive venture capital, let’s still continue.
Only 300 startups received venture capital.
As a result, 99.95% of all entrepreneurs never receive venture capital for their business.
Your probability to get late-stage venture capital funding is even smaller. In fact, it is lower than 1%, according to Dileep Rao.
The problem
Too many startup founders dream of and therefore go after becoming a member of the ‘Unicorn-Club’. Even though you should think big and follow ‘Billion or Bust’ attitude, you must be aware that your likelihood of success is damn small.
If you are driven by things other than pure belief, passion and willpower, you will be doomed to fail.
As figures show, only a few entrepreneurs will ever raise venture capital.
Think about your startup as a project
That’s why Sam Altman advises you to initially think about your startup as a project — not a business (taken out three snippets that hopefully don’t appear out of order).
It’s far better to be thought of — and to think of yourself — as a project than a company for as long as possible.
Projects have very low expectations, which is great. Projects also usually mean less people and less money, so you get the good parts of both flexibility and focus.
The best companies start out with ideas that don’t sound very good. They start out as projects, and in fact sometimes they sound so inconsequential the founders wouldn’t let themselves work on them, if they had to defend them as a company.Google and Yahoo started as grad students’ projects. Facebook was a project Zuckerberg built while he was a sophomore in college. Twitter was a side project that started with a single engineer inside a company doing something totally different. Airbnb was a side project to make some money to afford rent. They all became companies later.
— Would-be startup founders: Focus on building the right mentality, mindset, and values at the beginning of your entrepreneurial career. Start side projects and work on seemingly bad things.
If you are driven by career purposes or getting rich, then don’t start. Because you’ve got it wrong from the beginning. Even though money is always more tempting than many other things in our world, money — even more so in startups — is only a means to an end.
For the most successful startup founders, money and financial success aren’t what makes them get up every morning.
Welcome to The Unicorn Club — 2015
Here are 10 learning from an updated analysis done by Cowboy Ventures:
- We found 84 U.S.-based companies — The ‘Unicorn Club’. They are super rare as they stand for just 0.14% of all venture-backed consumer and enterprise tech startups.
- On average, eight unicorns were born per year in the past decade (versus four in the 2003–2013 era).
- Consumer-oriented companies drive the majority of value.
- Enterprise-oriented companies are fewer and raise less private capital.
- In terms of business models, e-commerce companies drive the majority of value. Enterprise and audience companies have decreased in market share while SaaS companies have grown in market share significantly.
- It has taken ~7 years on average before a ‘liquidity event’ (for the 39% of startups that have ‘exited’ — not including the 61% of startups that remain private).
- Companies with educated, tech-savvy, experienced 30-something-year-olds, co-founding teams with history together have built the most successes. Founders in their twenties and successful pivots are the minority.
- San Francisco maintains dominance as the new epicenter of the Bay Area’s most valuable tech companies; cities like NYC and L.A. are growing in importance.
- Immigrants play a huge role in the founding and value creation of today’s tech companies.
- There’s still too little diversity at the top.
Gaining perspective on startup fundraising madness
Let’s look at three examples: Facebook, Twitter, and Uber.
Facebook and Twitter give you an idea of how the fundraising path from start to exit can look like. Both startups are already listed and have reached the highly wished, hoped and blessed for a liquidity event.
They aren’t ‘private companies’ anymore. Unlike Uber! Uber just breaks all records and sets a new benchmark for the financing of startups.
Never has a startup been so highly valued and tempered so much scepticism, hate, and misunderstanding within the startup world and foremost outside.
— Disclaimer: Figures are retrieved from Crunchbase.com — a free startup database — as of October 30, 2015.
Startup fundraising madness #1: Facebook
Crunchbase: $2.43B Milliarden in 11 rounds
- Jan, 2011 $1.5B / Private Equity
- Jun, 2010 $210M / Private Equity
- May, 2009 $200M / Series D
- May, 2008 $100M / Debt Financing
- Mar, 2008 $60M / Series C
- Jan, 2008 $15M / Series C
- Nov, 2007 $60M / Series C
- Oct, 2007 $240M / Series C
- Apr, 2006 $27.5M / Series B
- May, 2005 $12.7M / Series A
- Sep, 2004 $500k / Angel (Peter Thiel)
Today, Facebook is worth 260 Billion Euro. This can be compared to one-quarter of the 30 biggest German companies listed in the so-called ‘DAX’ (30. October 2015: 1060.21 Billion Euro).
Isn’t that insane?
Startup fundraising madness #2: Twitter
Crunchbase: $1.16 Billions in 11 rounds
- Sep, 2011 $400M / Secondary Market
- Aug, 2011 $400M / Series G
- Dec, 2010 $200M / Series F
- Jan, 2010 $5.17M / Series E
- Sep, 2009 $100M / Series D
- Feb, 2009 $35M / Series C
- May, 2008 $15M / Series B
- Jul, 2007 $5M / Series A
Despite an IPO and more than 300 million active users, Twitter is one of Silicon Valley’s most controversial and critically discussed startups for two reasons.
Firstly, Twitter goes against Silicon Valley’s beliefs of how to build a company. Silicon Valley’s playbook often contains massive funding, conquering ‘winner takes it all markets’ and leaving no room for competitors. Along this way, nobody — neither startup founders nor investors — care about spendings. It’s all about acquiring as many users as possible to lock down a market.
We wanted flying cars, instead we got 140 characters. ― Peter Thiel
Secondly, Twitter is a symbol of criticism over Silicon Valley’s output in innovations. In- and outsiders would like to see harder solved problems tackled.
Startup fundraising madness #3: Uber
$8.21 Billion in 13 rounds from 53 investors
- Sep, 2015 $1.2B / Private Equity
- Aug, 2015 $100M / Private Equity
- Jul, 2015 $1B / Series F
- Feb, 2015 $1B / Series E
- Jan, 2015 $1.6B / Debt Financing
- Dec, 2014 $1.2B / Series E
- Jun, 2014 $1.2B / Series D
- Aug, 2013 $258M / Series C
- Dec, 2011 $37M / Series B
- Feb, 2011 $11M / Series A
- Oct, 2010 $1.25M / Angel
- Aug, 2009 $200k / Seed
Uber is the most glaring example. It isn’t an example of a normal startup fundraising path — but yeah, what is normal anyway. Uber shows beautifully how mad the growth of startups can be.
The latest publicly-known valuation of Uber is 60 billion U.S. dollars. That’s more than 80% of the DAX-listed companies. It is even assumed that Uber is now worth 100 billion. This means that Uber would be the largest company in Germany — only 6 years after its start.
That’s pure startup fundraising madness. Let’s discuss this another time if that’s healthy, personally meaningful or desirable.
StartupGeist Knowledge Base
StartupGeist summarizes insights and experiences from digital entrepreneurs, startup experts, and founders. This article is based on …
- Paul Graham: Black Swan Farming
- Paul Graham: Startup Investing Trends
- Paul Graham: Investor Herd Dynamics
- Crunchbase: Free Startup Database
- Sam Altman: Projects and Companies
- David Cummings: Billion or Bust
- TechCrunch: Welcome To The Unicorn Club, 2015: Learning From Billion-Dollar Companies
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I am Danny and started StartupGeist to help students and recent graduates build a business — and have a good life. Why? To be free, financially independent and healthy. How? Build a growth mindset and deliberately practice skills that turn your ideas into something bigger.
Originally published at startupgeist.com on January 26, 2016.
