I am commenting on this superb post by Fred Wilson, the VC posting in AVC. I am often using the data in my posts. It is very valuable data (and fascinating to data nerds such as myself). The TLDR summary:
“It takes seven to ten years to get to real liquidity in a portfolio of early stage venture investments. You can’t short cut it. It just takes time. But come years seven, eight, nine, and ten the returns will start coming in.”
Comments are closed on this AVC post so I am commenting by linking from my post to his.
There is a a quibble. Some rocket ship ventures get there in 5 years. Think Facebook and in Fintech maybe Revolut. However those exceptions prove the rule and even if Facebook got profitable in 5 years, it took until year 8 before it was “minting money” ie it entered its prime CAP (Competitive Advantage Period) years. However the missing perspective addressed by this post is that of the bootstrapping entrepreneur.
As a crypto fan, I am open to the idea that you can get to tradeability much sooner. However tradeability is very different from liquidity (which requires enough buyers and sellers interested in that asset). Even when you have liquidity, it can take a lot longer for the venture to have any real value.
So the 7-10 years rule is almost like the law of supply and demand, something you can bank on not changing.
Almost – but not quite.
Fred Wilson is Partner in a VC Fund and has done a lot of angel investments. So his data set is for companies funded by angels and VC Funds. Companies that grow through bootstrapping tend to take longer.
There is a myth in the startup world that bootstrapping is only good for creating small companies. Many entrepreneurs only want to create a small company, because life is about more than work. However many companies became quite big and profitable without any external capital. For example, Microsoft was already profitable when they did their IPO, without any earlier VC or Angel money. They did an IPO to give their employees liquidity for their shares.
For many entrepreneurs, bootstrapping is the only option because they are in the wrong location or are too old or the wrong sex or religion or color. Bootstrapping is more like sailing than a powerboat race. In a sailboat, you will always get to your destination with enough skill. The powerboat will beat you – unless they run out of gas! You will never run out of wind, but you may have to wait for the wind to return.
Bootstrappers often go after markets ignored by investors. They see potential in markets that conventional wisdom says is dead. Bootstrapping takes longer than building a business with external capital, but once you get to cash flow positive you are not operating based on the whims of investors; but it does take longer. The motorboat will start faster but is totally stuck if it runs out of gas, but the sailboat simply waits for wind. If you also operate in a markets that conventional wisdom says is dead it can take longer – but it is nice not having competition offering services at prices funded by investors.
I am speaking from experience as I was too old to raise angel/VC money when I started Daily Fintech and the business operates in the B2B Media market that conventional wisdom says is dead; I believe that B2B markets have a big need for quality information and there is good money to be made providing that information but I recognise the need to be patient until conventional wisdom is seen to be wrong.
Bernard Lunn is Editor and CEO of Daily Fintech and author of The Blockchain Economy
Daily Fintech’s original insight is made available to you for US$143 a year (which equates to $2.75 per week). $2.75 buys you a coffee (maybe), or the cost of a week’s subscription to the global Fintech blog – caffeine for the mind that could be worth $ millions.