We looked at the level of VC ownership of 105 tech companies at the time they went public. The goal was to determine what level of VC ownership was at the time of exit. The median and average level of VC ownership at exit was 53% and 50% respectively. In other words, by the time of exit, VC will likely own half your business.
A few observations:
Be profitable. Businesses that tend to be more profitable have lower levels of VC ownership. For instance, ecommerce and hardware, both of which are sectors which tend to generate cash, had median VC ownership levels of 44% and 42% respectively.
Be hot. Raising rounds at very high valuations is another way to preserve equity. To achieve this, you’ve got to be a hot company in a hot sector such as social media. When Facebook and Snapchat IPO’d for instance, VC ownership was only 17% and 18% respectively.
Tier 1 VC are real. Certain VC showed up on the list repeatedly. Frequent appearances were made by Benchmark, Sequoia, Greylock, Bessemer, and Khosla, among others. Indeed if you can raise capital from the names on this list, you’ll have someone in your corner that has shepherded companies to the promised land before. Arguably the odds of success (defined as going public/exiting) increase.
Strategics don’t matter. Strategic investors, which are corporations that make venture investments, were only present in 17 out of the 105 IPO’s we looked at. It leads us to conclude that while a strategic investor can be valuable, they’re not necessary for success. Strategic investments in the list include Delta Airlines investing in Priceline, USAA investing in TrueCar, Fox investing in Roku, etc.
Where it the rest of the equity? If VC own on median 53% and founders own on median 15%, where does the rest of the equity go? A variety of places including to employees via stock options, to companies you’ve acquired along the way where part of the price was paid in stock, to board members, to consultants for their services, etc. 30% is a big number so as you can see, little grants here and there add up. Be stingy.
In order to preserve your equity, run your business as lean as you can and make cash efficiency and frugality a part of the culture. Scrutinize ever option grant no matter how small because over the long run it does add up. Also be very cautious about granting equity in M&A or for services — if you’re successful, those shares you gave away to your board members, lawyers, accountants etc will end up being the most expensive services you ever bought.
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