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How often do series C startups fail to exit?

by Jessica Shu1 min read21st Sep 202014 comments

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How often do series C startups really fail? By fail I mean never have an acquisition or IPO. Internet says 80% (see https://medium.com/journal-of-empirical-entrepreneurship/dissecting-startup-failure-by-stage-34bb70354a36) but this seems very high to me.

Most Series C companies are worth in the 100-200M range, the one I'm at is worth 270M. How does all the value just evaporate? What happens to the companies that "fail"?

Asking to decide whether to exercise my options. I only need my company to exit at 41M to break even. I am bearish on the company but with around 40M in ARR it is hard to imagine it not exiting.

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Believe the internet.  Most really do fail, and return little or nothing to restricted share- or option-holders, who couldn't sell early as part of other funding deals.

How does all the value just evaporate? 

The problem is that the company is trying to grow, and will increase it's ARR by an order of magnitude in pursuit of that growth.  If they don't actually find a sustainable market, that won't justify an IPO or forward-looking exit.  And then, when the valuation starts to fall, it becomes VERY unattractive to any buyer, who thinks "what am I really getting for this, and why not just wait until it's zero and pick up the remains from the bankruptcy court"?  

Most Series C companies are worth in the 100-200M range, the one I'm at is worth 270M. How does all the value just evaporate? What happens to the companies that "fail"?

 

There's no way to short series C startups, and the market is not open.  It's not an efficient market, so I wouldn't equivocate "VC's valuing the company at X" with "The company being worth X". Recall that most funds don't make money.

Even if it was an efficient market, you have to remember that VCs are black swan farming.  So they're investing in a whole bunch of companies at a valuation $x00,000,000, with the expectation that many of those will go to 0 or be lower than their valuation, in order to get their few unicorns.

I vaguely recall that the first startup I was at made it to series D. Or maybe it was just C. Either way, it was around $200M, and we ended up going bankrupt, which I attribute to a couple different things: (1) the market that the exec's and board were targeting didn't really develop fully - although it was probably large enough to support our small company. Which brings me to... (2) the large customers that would have bought enough to support us didn't want to buy from a small company - they bought from more established companies, even if our product was more aggressively priced and better in every way. Which leads to the ultimate reason: (3) early on, the exec's/board didn't accept a buyout from one of those more established companies.

The assets were bought by a second start-up, which I believe did get its own series D, and maybe even E. The problem was they were in the same line of business and could see that the market wasn't expanding (sales basically flat year to year and we flirted with profitability) - so they bought a third startup that was actually in a growing market but struggling financially (partially due to mis-management, I believe). This combination was going to be the key to an IPO... except that the financial crisis happened around the time. Now we were a company where sales weren't growing fast enough to support the burn rate - so the combined company ended up getting sold to an established company for well less than the invested value. I was lucky and happy to basically get my money out of the shares that I exercised at the second start-up.

So as you can see, there are lots of ways the company might not "exit": greed, market doesn't develop as planned (or dries up more quickly than anticipated), exit options become unavailable (for whatever reason), exit timing becomes sub-optimal. If each of those can be discounted with high confidence, then maybe I'd consider investing.

Keep in mind you are not getting the same terms as the investors. And the valuation is based on the terms the recent investors got. See more details: https://www.benkuhn.net/terms/