If You Want To Build A Large, Enduring Company, Now Is A Terrible Time To Do It

China Burning Building Fire

If you take funding from a venture capital firm or angel investor and want to build a large, enduring company (rather than sell it to the highest bidder), this isn’t the decade to do it.

The collapse of the IPO market and dysfunctional maths in the venture capital community has stacked the odds against you.

Here’s why.

Click here to see why the odds are stacked against you >
Steve Blank teaches entrepreneurship at U.C. Berkeley, Stanford University and the Columbia University/Berkeley Joint Executive MBA program. He also wrote about building early stage companies in his book, Four Steps to the Epiphany. This post was originally published on his blog, and it is republished here with permission.

The Golden Age for Entrepreneurs and VC's


During the decade between 1991 and 2000, nearly 2000 venture backed companies went public. Take a look at the chart below. (It includes venture funded startups in all industries, from software to biotech. Source: NVCA.)

The size of the red bars (IPO's) versus blue (mergers and acquisitions) illustrates that while venture-backed startups did get acquired, the IPO market was booming.

Free at last

Success means that you're acquired

The public markets for venture-backed technology stocks never really recovered after the collapse of the dot-com boom. Fast forward to today and take a look at the last 10 years of IPO's and M&A's in the chart below, and you'll see why life is different for entrepreneurs.

Depending on your industry, in this decade it's 5 to 10x less likely that your company will have an IPO as an exit. And what the chart doesn't show is that the dollar amount of the deals are significantly smaller than the last decade.

Since there's no public market for the shares your venture investor has bought in your startup, the most reasonable way for a venture firm to make money is to have you sell your company to another company.

But unlike an IPO where you sold stock to the public and got to run your company, in an acquisition your company is gone, and the odds are in a year or so you will be too.

What about us?

But not all industries are as capital efficient as the Web or Information Technology. Biotech, medical devices, semiconductors, communications and CleanTech require significantly more capital to build and scale before they can generate profits. It's in these industries that the lack of a public market has taken the heaviest toll on entrepreneurs and their startups. Great companies with innovative ideas have simply died not having the cash to scale. VC's who would have normally kept writing checks were faced with no public exits and cut them off.

Some of these industries have turned to the U.S government for funding. Elon Musk has not only tapped the feds for his electric car startup Tesla, but also received hundreds of millions for his space launch company -- SpaceX. Other Clean Tech companies have tried this approach as well. Yet while the U.S. government doles out funds to connected entrepreneurs, it lacks an integrated strategy to deal with the lack of public market financing for critical growth industries.

It may be that these entrepreneurial industries suffer the same fact as manufacturing in the U.S.- they die out of benign neglect and a lack of a coherent understanding of the role of risk capital in our national interest.

What does it mean to an entrepreneur?

If you're starting a software company, your exit is most likely a sale to a larger company. This decade has been a Darwinian filter -- only the very best companies will survive as standalone companies.

If you're starting a company in other, capital intensive industries, it's no longer just about having great technology. You need a plan for partnership and long term funding from day one.

In either case Customer Development provides entrepreneurs with a methodology for being capital efficient.

We live in interesting times.

Lessons learned:

  • Advice that's more than 5 years old is obsolete.
  • Software startups are most likely to exit as an acquisition.
  • Being acquired has lots of maths challenges about your valuation, amount of money raised, per cent of founder ownership, type of investor, etc.
  • Non-software companies need to be thinking much deeper and further than ever before about search, build, grow funding strategies. It's no longer just about building great technology.
  • Customer Development provides entrepreneurs with a methodology for being capital efficient to scale when the funding environment demands it.
  • You will probably not survive the acquisition.

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