BLOG STARTUPS, VENTURE AND THE TECH BUSINESS
In search of the next “Rocket Ship”
How long does it take promising young startups with large potential markets to scale to $50MM? Longer than you might think if you looked at the projections of the average startup that comes through our door.
An article in the Wall Street Journal Blogs online discusses how long it took many well known public companies to get to $50MM in revenues (http://blogs.wsj.com/venturecapital/2009/08/25/how-long-does-it-take-to-build-a-technology-empire/?mod=rss_WSJBlog). It refers to some data that was actually compiled by data visualization company Tableau (http://www.tableausoftware.com/blog/myth-versus-data-financial-markets).
It analyzed 100 of biggest and most well known technology public companies to find out how long it took them to reach $50MM in revenues. It classified companies that got to that mark in 6 years or less as “Rocket Ships.” Only 28% of the nation’s top software companies made this category. I was actually surprised to see that. Off course, any of these companies have grown to be the giants of the industry and it takes a lot more that an initial spurt of growth to become an independent public company, but it was humbling to see that even the most dominant companies in tech sometimes take a while to connect with the market.
Yet this is exactly what we look for in portfolio companies. The opportunity for explosive growth. In fact, one could argue, that in our firm our entire investing approach is geared towards finding the company that can be the next “Rocket Ship.” We look for companies that are: (1) addressing new emerging mass markets (markets that are developing fast with no clear leader and can be what one of my partners calls unbounded); (2) capital efficient (requiring lots of capital to grow creates growth barriers as well as extra risk for early stage investors); (3) have a strong and profitable business model (that creates extra cashflow to fuel growth). It’s hard to predict who will achieve this and from the data it is obvious that few do. We have been fortunate to have backed 3 “Rocket Ships” in the past (EnerNOC (Public: ENOC); Divx (Public: DIVX); and Mobile365 (acquired by Sybase); Globallogic (still in our portfolio) came close but missed the mark by a year or two). Understanding the elements that make companies potential “Rocket Ships” is very hard and is the “art” in our business. And getting to these companies early is important because once they get going It is harder to access as an investor.
The above stats highlight why investors tend to be skeptical when every other startup projects a $50MM run-rate or higher in 5 years. It’s just hard to achieve. In the case of the EnerNOC, DivX and Mobile365, they met or exceeded the initial projections they showed us in the first meeting, which is why we are still interested in talking to entrepreneurs who think they have the next “Rocket Ship”!!
