Why VC funding might spike your dreams
By Francis Moran
One of the more thought-provoking presentations at last week’s International Startup Festival was by Randy Smerik, a serial entrepreneur who has lived through more than one startup, venture capital investment and eventual acquisition. His personal experience added a significant note of authenticity to his session, “Build 2B Bought,” but it was the statistics he presented that really got me thinking.
Let me summarise Smerik’s narrative.
- There is a 90 percent chance that the eventual liquidity event for a startup will be its acquisition by another company.
- The average merger-and-acquisition (M&A) exit is worth $20 million.
- A VC investing only $2 million into a company and acquiring 20 percent of its equity based on a $10-million post-money valuation will need to earn $20 million on that investment to get the minimum 10x return that VCs target from each investment. (Admittedly, Smerik did acknowledge that most funds get a 20x to 30x return from two out of every 10 investments they make, with the other eight returning little or nothing.)
- At a 20 percent ownership level by the VC, that means the company must sell for $100 million.
- But the average M&A deal is only $20 million.
As Smerik said, “Yikes! This is a problem.”
