On average, it takes a startup ten years from founding to scale to the startup being ready for an IPO or exit. Some venture-backed startups might IPO in as little as 1 to 2 years if given large amounts of capital upfront. However, most venture-backed startups take about 6 years and five funding rounds before scaling to an exit or IPO.
Understanding the timeline and the variables that affect a startup's IPO timeline is crucial for both startup founders and investors. In this comprehensive guide, we delve into the factors that influence how long it takes for a startup to exit or go public.
Table of Contents
What Is a Startup?
Before delving into the intricacies of startup exits and IPOs, it's important to establish what we mean by the term "startup." A startup is a young company founded with the aim to solve a specific problem or fill a particular gap in the marketplace. Unlike traditional businesses, startups are characterized by their focus on scalability and growth. They often venture into uncharted territories, introducing innovative products, services, or business models. With a high-risk, high-reward landscape, startups seek significant financial backing to accelerate their growth, frequently from venture capitalists, angel investors, or through equity crowdfunding platforms like StartEngine and Wefunder. Understanding the nature of startups is crucial for both entrepreneurs and investors as it sets the stage for the financial journey that culminates in either an exit or an IPO.
What Does Exit Mean for a Startup?
In the startup ecosystem, an 'exit' typically refers to a situation where the startup and investors sell the ownership of the company to another entity. The primary forms of exit are acquisitions, mergers, and Initial Public Offerings (IPOs). However, this could also be a secondary market offering or secondary sale in some instances. At it's core, an exit is simply when investors see a return on their startup investment. The various types of exits include:
Initial Public Offering: When a company lists on a stock exchange
Acquisition: When a startup is bought out by another entitiy
Merger: When the startup merges with another entity
Stock buyback: When a company sends out an offer to buy shares back from investors
Tender offer: When an investor offers to buy stock from other investors
Secondary sale or trade: When companies shares are tradable on secondary trading platforms like CartaX, StartEngine Marketplace and StartEngine Secondary.
This list encompasses the overwhelming majority of ways that investors see a return on their startup investments.
What is an IPO?
An IPO, or Initial Public Offering, is the process by which a private company can go public by sale of its stocks to the general public. This move not only provides the company with access to a larger pool of investors but also validates its business strategy on a grand scale. At this point, the company is no longer considered a startup and is typically considered an established entity.
Why Do Exits Matter?
Unlike the broader stock market, startup investors cannot sell their shares after investing.
When a startup sees an exit, typically, investors see a return on their investment and receive cash, which they can then reinvest. Since startup investors have their capital locked up for years in most cases, if investors never see a return on their investment, they cannot receive more money to reinvest into more startups.
How Startup Investing is Different than Stock Market Investing?
Investing in startups presents a markedly different landscape compared to traditional stock market investments. When you invest in a startup, you're often buying equity in a company at a very early stage, sometimes even before it has generated substantial revenue or achieved market validation. This early-stage investment is fraught with uncertainty and risk, as many startups fail to progress beyond their initial stages. Unlike publicly traded companies, startups are not subject to the same degree of regulatory oversight, nor do they offer the same level of transparency.
Liquidity is another significant consideration; stocks can usually be sold at market value almost instantly, while startup investments are illiquid and generally require a long-term commitment, often spanning years, until an exit event like an acquisition or IPO occurs. Additionally, startups don't usually pay dividends, making them a purely capital gains play. For these reasons, startup investing is considered higher risk but potentially offers higher rewards, making it crucial for investors to conduct thorough due diligence and understand the unique challenges and opportunities that come with this investment class.
The Time Frame: An Overview
The timeline for a startup to exit or go public can vary widely. According to data from industry analysts, the average time to exit through an acquisition is approximately 5-7 years from the startup's inception. For those going the IPO route, the timeline extends, on average, to 7-10 years. However, these are general guidelines, and the actual timeline can differ based on numerous factors, which we will discuss below.
Seed-Stage Startups: The Starting Line
Average Time to Exit: 7-10 Years Seed-stage startups are at the beginning of their journey. They usually have an idea, a prototype, or a minimum viable product but lack market validation. Due to the nascence of their operations and the risks involved, these startups might take the full 7-10 years to reach an exit. Factors such as market receptivity, funding constraints, and the evolutionary pace of the business model significantly influence the timeline.
Series A and Beyond: The Acceleration Phase
Average Time to Exit: 5-7 Years Top venture capital firms often invest during the Series A stage, targeting a 5-year exit timeline for their portfolio companies. By this point, startups usually have some market validation and are aiming to scale their operations. Depending on the market size and the efficacy of the business model, these startups generally exit faster than their seed-stage counterparts.
Later-Stage Startups: Nearing the Finish Line
Average Time to Exit: 1-5 Years Later-stage startups, often in Series C or beyond, are closer to an exit, either because of market dominance, robust revenue streams, or strategic positioning. For them, the timeline can be as short as 1-5 years to exit, driven by factors like a mature business model and substantial funding.
The Five-Year Rule of Thumb
It's generally advisable for investors to anticipate a holding period of at least five years when investing in any startup. This time frame provides a reasonable window to evaluate whether the startup is on a path toward an exit or, unfortunately, bankruptcy.
Factors Influencing the Timeline
Various external and internal dynamics play a significant role in accelerating, delaying, or even derailing a startup's exit and IPO timeline. Whether you're an entrepreneur gauging the longevity of your venture or an investor contemplating the risks and rewards of your portfolio, understanding these factors is essential for setting realistic expectations and making informed decisions.
1. Market Conditions
Fluctuating market conditions can speed up or delay exit plans. A bullish market is more receptive to IPOs and acquisitions, whereas a bearish market can put these plans on hold. Conducting an exit in poor market conditions will result in less capital for the company and a worse return for investors, thus discouraging exits in poor market conditions.
2. Business Performance
The startup's revenue, customer base, and overall growth play an essential role in determining the timeline for an exit. Startups often look to hit at least $100 million in revenue before moving toward an IPO. Startups that are profitable also have significantly more successful public offerings in general.
3. Competitive Landscape
The presence of competitors, market saturation, and disruptive innovations can influence how quickly a startup exits or goes public. For example, when Tesla was gaining hundreds of billions in market capitalization between 2019 and 2021, several electric vehicle companies conducted IPO's and were acquired at high valuations due to hype in the market.
4. Regulatory Environment
Legal frameworks and regulations, especially in fintech or healthcare startups, can affect the time it takes to go public or get acquired.
Conclusion: Risk and Rewards
Startups are high-risk, high-reward ventures. Considering the volatile nature and long holding timeframes, it’s paramount to only invest what you can afford to lose. This caution is especially relevant for those entering the startup investment scene through equity crowdfunding platforms like StartEngine and Wefunder, where the risk profile can differ substantially from traditional venture capital investments.