Most global tech startup exits have no venture capital funding
Once a myth takes hold it's difficult to debunk it and venture capital funding is commonly seen as synonymous with tech startups but in reality it isn't.
In 2014 we reported that about 76% of US tech companies acquired in 2012 had not raised institutional investment (VC/PE - private equity) prior to acquisition. In addition, about 75% of venture capital-backed US startups do not return investors' money. The common rule of thumb is that of 10 startups, only three or four fail completely. Another three or four return the original investment, and one or two produce substantial returns. However , the National Venture Capital Association estimated that 25% to 30% of venture-backed businesses fail outright.
The Wall Street Journal reported in 2012 that research by Shikhar Ghosh, a senior lecturer at Harvard Business School showed that venture capitalists "bury their dead very quietly." Ghosh added: "They emphasize the successes but they don't talk about the failures at all."
In recent years the Irish Government has provided about 40% of VC funds for use in Ireland.
The US position on tech exits not dependent on institutional investment, is also found elsewhere.
Research published this year shows that 73% of global technology businesses acquired or floated in 2014 were not the recipients of either venture capital, private equity or growth capital prior to exit — up from 66% in 2013.
CB Insights, a US firm, reports that 2014 saw 2886 tech exits (2807 M&A and 79 IPOs). This represented a huge step up versus 2013 which saw 1825 tech exits. The 58% increase in exit activity was driven by strength throughout the year as every quarter of 2014 eclipsed 2013. Q2 2014 was a breakout quarter with 731 M&A & 31 IPOs (initial public offering) and included notable public offerings for Jingdong and Just-Eat.
After just 17 private tech companies exited for a $1bn+ valuation in 2013, that number nearly doubled to 32 in 2014. Even with the increase, this represented just 1.1% of tech exits in 2014. The vast majority of exits are for < $200m. 41% of tech transactions with disclosed valuations last year were for less than $50m.
Behind the US, the UK and Germany were in the top 5. Canada had a 3rd rank. India saw strong ecommerce exit activity keeping it in the top 5. Ireland has a 20th rank — it's likely that some of the exits are Irish because of tax residency.
Google was the top tech acquirer in 2014. According to Time, at least 221 startup founders joined Google’s ranks between 2006 and 2014.
“Companies are buying innovation,” Peter Levine, a general partner at venture capital firm Andreessen Horowitz, said this year. “As large companies need to be competitive and want to increase their footprints in a variety of different areas, one of the best ways to do that is through acquisition.”
A study by the Kauffman Foundation of almost 500 high-growth companies among the Inc. 500|5000 list of fastest-growing companies in America, found that less than 7% of high-growth firms have received venture capital.
To qualify as a 500|5000 firm, a private company has to have at least a 20-fold rise in revenues in 3 years with revenues of at least $2m in the most recent year. 2015 list.
Just over a fifth of the firms are in IT Services, Software and Computer Hardware — thus in the US a high growth firm is not typically in the technology sector.
CB Insights reported last month that VC-backed companies continue to raise more money, with the first half of 2015 seeing nearly $60bn invested across more than 3,500 deals. This puts the year on track to hit nearly $120bn worth of investment, growth of 35% from last year’s already record-high funding total of $88.3bn. "However, deals have not followed the same growth, with 2015 on track to be the first year without deal growth since 2011. This suggests that deals are getting larger, which is evidenced by the increasing presence of $10m financings."
CB Insights said that internet and mobile continue to account for the bulk of deals to VC-backed companies, as the two major sectors accounted for 65% of all deals in Q2’15. All other sectors remained fairly range-bound with healthcare accounting for 12%, software 5%, and consumer products & services at 3%.
From the 2015 Silicon Valley Index