December 17 2014
by Todd Hixon

Twitter, The Morning After: Why Entrepreneurs Love … And Hate … Huge Exits

[This post first appeared at on November 8, 2013.]

U.S. exits of venture-backed companies in 2012: percent of value versus percent of companies. (Source: New Atlantic Ventures)

Welcome To The Unicorn Club: Learning From Billion-Dollar Startups | TechCrunch.

Huge exits (“unicorns”) are a dilemma for entrepreneurs: they make the venture world work, but they are so rare that the great majority of entrepreneurs can’t realistically expect to achieve one. For investors, the return comes heavily from the big exits. So the money chases unicorns: it crowds into the few funds that invested in past unicorns, and into growth funds that can get a piece of the breakout winners as they scale up. That leaves most entrepreneurs on short rations. And the rewards for entrepreneurs are similarly skewed, both recognition and money. The Gini index for the entrepreneurial economy is about 90%, versus a much-decried 38% for the U.S. as a whole. You can’t put your kids through college with lottery tickets (probably). What keeps entrepreneurs going in such a frustrating system?

In the post linked above, Aileen Lee and her colleagues at Cowboy Ventures paint this picture well. Aileen identifies 39 billion+ dollar exits (which she calls “unicorns”) in the last decade out of 60,000 start-ups (by her reckoning). On average per year, that works out to 4 unicorns among 6,000 start-ups: 1,500:1 odds against the average start-up becoming a unicorn. If I use the University of New Hampshire’s number of 66,000 angel funded start ups per year, then the odds are much longer: 16,500:1.

And total exit value for venture capital backed companies is quite skewed to the big exits. I compiled data on exits of venture-backed companies in 2012: M&A exits with published values* and IPOs. The Unicorns were 2.5% of these exits by number and over 50% by value**. Last year included Facebook, a “super-unicorn” which Aileen observes happens about twice a decade (Twitter is another). Facebook alone was about 1/3 of total exit value; however, without Facebook, the top 3% of exits would still have been ~40% of total exit value in 2012.

Not surprisingly, many entrepreneurs and investors are trying to “find the next Facebook”. Aileen profiles the characteristics of the unicorns. She concludes that it’s difficult to construct a unicorn-finding filter: “For those aspiring to found, work at, or invest in future unicorns … anything is possible. All these companies are technically outliers: they are the top .07 percent. As such, we don’t think this provides a unicorn-hunting investor checklist, i.e. 34-year-old male ex-PayPal-ers with Stanford degrees, one who founded a software start-up in junior high …”

What does this mean to everyone else who aspires to be an entrepreneur? A few thoughts:

1.  If you want to run in the fastest race for the highest stakes, there is a case for going to Silicon Valley. 27 of Aileen’s 39 unicorns are located in the Bay Area. But, there are strong entrepreneurial ecosystems in a half dozen other places in the U.S.: Boston, New York, Southern California, and Seattle to be sure. We see surprisingly good opportunities in the DC area. A case can be made for 1 or 2 more.
2.  Entrepreneurs are a diverse lot. The valley stereotype has validity, but there are many variations. As Aileen says, every unicorn is an outlier.

3.  Different regions have different skill sets. Silicon Valley is pre-eminent in social networking today: Facebook, Twitter, LinkedIn, Instagram, Pinterest, etc. It’s very strong in Digital Media: Pandora, Stitcher, etc. It does not lead in e-commerce: Amazon is in Seattle, GroupOn in Chicago, the fashion-commerce companies are mainly in New York, where the venture renaissance has been built on e-commerce and ad-tech. DC is ground zero for cybersecurity and strong in ed-tech. Boston is strong in enterprise software, computer infrastructure, education, and travel-tech. Digital healthcare is spread around the country.

4.  While the biggest exits happen in the valley, the venture returns are not necessarily highest there. I’ve seen studies that say East Coast and West Coast venture returns are comparable. Many businesses can launch on $20-$30 million (pin money in the valley), which means that a $500 million exit is a 20x. We’ve had quite a few exits like that.

5.  Most of us are attracted by a vision of great riches, but the best entrepreneurs are not primarily motivated by money. Tim Draper taught me this when I started out as a VC. Entrepreneurs are inspired by a business idea, they love building things, and they want to change the world, and make some good money doing it. You don’t need a unicorn to do that.


*There are many M&A exits for which the value is not published, but they are predominantly at the very small end of the distribution.

**NAV’s analysis is based on the total enterprise value of venture-backed companies that exited in 2012, including the shares in IPO’d companies that are not yet trading, valued as of 12/31/12. It’s common in the venture industry to count as “exit value” only the value of the stock trading post-IPO, which is typically about 20% of the equity, so a billion dollar IPO exit on that basis means an enterprise value of about $5 billion. I suspect Aileen did her numbers that way, based the number of unicorns she counts. This difference impacts the numbers somewhat but the conclusion does not change.

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