The First Time Founder Discount
Venture is a cyclical business. But in spite of dire bubble warnings, recent unicorn implosions, and a February 2016 nosedive in public SaaS valuations, the NASDAQ has now been on fire for nearly the past decade. In layman’s term, we’ve been on a (only slightly variable) linear up and to the right curve since 2009. That is contradistinction to the dot com boom of the late 90s which effectively lasted less than five years, from mid 1995 through NASDAQ’s peak in March 2000 – and, more importantly - was quickly followed by a deep recession which lasted for much of the early 2000s.
The effect of this extended period of abundance is a duration long enough for thousands of entrepreneurs to have raised venture money, struggled, solved, raised more money and exited materially (or failed, and, learned something).
As early stage investors, these founders (repeat founders, serial founders, successful founders, what have you) have become increasingly attractive to invest in because they frequently come with the ability to hire and scale up quickly as well as avoid many of the timely mistakes early in a company’s life that can eat up valuable seed stage dollars. Consider this the venture equivalent of a flight to safety, in an otherwise chaotic, early stage market.
The consequence of this flight to safety is that the early stage valuations of first institutional rounds for repeat founders have ballooned and round sizes have increased accordingly. I took a look at the past 24 months of investment data at Chicago Ventures to break out post-money valuation* and round size dependent on founder profile (n=30):
The highlights are that successful repeat entrepreneurs are raising rounds out of the gate nearly double the size of first time founders ($5.65M versus $2.85M, respectively). Anecdotally, the delta may actually be fundamentally wider as we’ve invested in repeat entrepreneurs far earlier in the go to market cycle (often, even pre-launch) than with first time founders (who typically have significant traction).
The effect of this is that first time founders need to thread often competitive markets on limited resources, and then, even with “traction,” will be blessed with only half the resources of more accomplished peers. This is why I tell entrepreneurs that in spite of press to the contrary, it remains a brutal fundraising market.
If there’s a silver lining, it’s that across both founder profiles, first institutional rounds represent approximately 25% of the fully diluted post-money valuation. Seed/A investors have clear ownership targets and that doesn’t seem to change much based on founder profile.
* For rounds raised on convertible notes I have used the cap on the notes as valuation. I recognize this is imperfect. If all notes converted at the cap, this would actually significantly underestimate the valuations of these rounds (as those caps are mostly pre-money caps) but I’m assuming some % of notes will either not convert (company fails) or convert at a discount.