Startups that exit for over $1 billion are a rarity. They’re so rare that folks have come up with nicknames to describe these rare beasts (unicorns and thunder lizards to name two). Since building a billion dollar company or unicorn is so hard and so rare, it naturally follows that identifying and investing in them is also pretty difficult. And the data on VC exits shows that there are, in fact, very few unicorn VCs.
While venture capitalists talk about wanting to identify and invest in billion dollar companies, the reality is that few VC investors actually do. Even when they do, very few are able to do it again highlighting the challenges that Ashby Monk of Stanford describes in his essay about bringing scale to venture capital. Moreover, for those who were astute enough to get into these big exits, getting in early is even rarer, highlighting the paucity of firms who can truly see around corners and who have access to truly superior dealflow.
As we work with Limited Partners, this is an area of increasing interest to them because performance persistence in venture capital is very real. In other words, in venture capital, it has been shown by studies that past performance actually is an indicator of future performance. Of course, performance persistence must be considered alongside other factors like network centrality and investment discipline and brand strength which have been shown to be indicators of VC performance as well. Combined, these factors create a Mosaic (note: only for LPs) which provides a holistic view into VC firm quality.
The Data
Using CB Insights venture capital data, we identified 45 venture-backed U.S.-based tech companies that exited (via either an IPO or an acquisition) between 2004 and 2013 YTD with a valuation of over $1B. We did not include companies that have not exited but which have rumored valuations as there is little certainty that they will be able to maintain those valuations (see Fab.com as one example).
We then analyzed the investors in these 45 billion dollar plus exits to understand and identify the trends among the Unicorn VCs.
The Results
104 VCs invested in these 45 billion dollar companies prior to their exits. 68 of them (65%) invested in only a single billion dollar exit.
Andy Dunn of Bonobos asked in his scathing “Dear Dumb VC” blog post, “How many companies are in your portfolio that have reached $1 billion in enterprise value? If the answer isn’t two, you are not good yet.” Below is the answer.
The following chart breaks down these investors by the number of billion-dollar companies they had invested in. The first bubble represents the 68 VCs who only invested in one billion-dollar company, which amounts to 14% of all active VCs. As we move to the next bubble – VCs that invested in exactly two billion-dollar companies – this number drops sharply to 17 (only 3.5%). The far end of the spectrum is comprised of the three VCs who had remarkably invested in 8 billion-dollar plus exits and who thus represent 0.6% of all active VCs.
The number of large exits in an investor’s portfolio does not necessarily correlate with the investment’s returns as the largest returns from a company’s exit usually go to the investors who jumped in earliest. In addition, just counting the number of large exits would serve to reward logo or trophy chasing VCs who invest in high-flyers late in the game presumably to say they were investors in the company and benefit from the halo effect that said participation might offer.
So to assess a venture capital’s investment selection proficiency, it is important to look at what stage they made their first investment in a company.
The next chart breaks down the investors based on the stage they invested in the companies. For example, let us consider the three investors – Sequoia Capital, Greylock Partners, and New Enterprise Associates (NEA) – with 8 >$1B exit each. In all, they represent 24 investments (3 investors × 8 exits, where an investment refers to the aggregate amount invested regardless of how many/which rounds the investor participated in). Of these, 12 investments or 50% were in a Series B or prior rounds.
This percentage decreases as one moves backwards across the chart. Of the 68 VCs that only had one >$1B exit, only 38% were first made in a Series B or prior round. In other words, 62% of the first investments made by the VCs into these firms were after the Series B stage highlighting how hard it is for VCs to identify and invest early in winners.
When narrowing the early stage criteria to only include Series A and seed rounds, the difference between a “lucky” VC and a “great” VC becomes much more stark. Only 18% of the investors who had only 1 billion dollar plus exit got in at the Series A or earlier. Farhad Manjoo’s recent piece on Snapchat suggested that kids are not reliable predictors of technology trends. Based on the fact that most VCs don’t invest in the big winners early, can the same be said for VCs?
Methodology / Notes
For companies that exited via M&A, the valuation is simply the amount that the company got acquired for. For a company that went public, the exit valuation was calculated using the closing stock prices on the day of the IPO.
The data comprised of exits that occurred between January 1, 2004, and on or before October 15, 2013.
All of the underlying exit and investor data used in this research brief is on the CB Insights Venture Capital Database. Sign up for free below and learn more about Investor Mosaic.