How much of your company will VC own at the time you exit? We looked at the level of VC ownership of 129 tech companies at the time they went public to answer that question. The median and average level of VC ownership at exit was 52% and 51% respectively. 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 40% 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 24 out of the 129 IPO’s we looked at. It leads us to conclude 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 52%, that means the rest of the equity is owned by founders, employees via stock options, companies you’ve acquired along the way where part of the price was paid in stock, warrants to lenders, board members, consultants for their services, etc. Little grants of equity 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.
Visit us at blossomstreetventures.com and email us directly with Series A or B opportunities at firstname.lastname@example.org. Connect on LI as well. We invest $1mm to $1.5mm in growth rounds, inside rounds, small rounds, cap table restructurings, note clean outs, and other ‘special situations’ all over the US & Canada.