For investors comfortable with high-risk, potentially high-return, investment opportunities, startups can be an appealing alternative asset option. Assuming this fits your risk profile and overall investment strategy, it’s important to set expectations on the time horizon of potential returns.
The Risks of Investing in Startups
When investing in startups, you are taking on a considerable amount of risk. Before investing a cent, you should understand your risk profile, which encompasses:
- Your time horizon
- Your risk tolerance
It’s possible that you may never see a return on your investment. Like any investment, you should never invest money you can’t afford to lose.
What’s the Difference Between Early- and Late-Stage Startups?
Another thing to consider is where the startup you’re considering is in its lifecycle. Seed and early-stage startups are typically not very far along in their journey. Oftentimes, they are seeking capital to invest in product development, developing customer acquisition strategies, building a team, etc. As a company moves from the seed-stage to early-stage, they may have a few users testing a beta product while continuing to fine-tune their go-to-market strategy and sales channels.
Late-stage companies are further along in the startup lifecycle. Usually, they have demonstrated viability and their product has become well-known. Oftentimes, they have begun expanding into new markets.
On the MicroVentures platform, offerings available to the public under Regulation CF tend to be early-stage companies, while those limited to accredited investors under Reg D range from early- to late-stage companies.
How Long Does it Take for an Exit to Occur?
So, with that information in mind, how long does it actually take for a startup to go from idea to exit? Unfortunately, there is no single easy answer. It depends on a lot of things and can vary from industry to industry. Generally, you will see 7-10 years given as a range estimate, but those aren’t hard cutoffs. For the sake of example, we will take a look at a few unicorns that exited through a public offering in 2019. (That said, a company doesn’t need to reach unicorn status to make an exit, nor does it need to exit through a public offering. Other possible exit scenarios include liquidation, acquisitions, or mergers.)
Lyft
Year Founded: 2012
Date of IPO: March 29, 2019
Time to Exit: 7 years
Tradeweb
Year Founded: 1997
Date of IPO: April 4, 2019
Time to Exit: 22 years
PagerDuty
Year Founded: 2009
Date of IPO: April 11, 2019
Time to Exit: 10 years
Year Founded: 2009
Date of IPO: April 18, 2019
Time to Exit: 10 years
Beyond Meat
Year Founded: 2009
Date of IPO: May 2, 2019
Time to Exit: 10 years
Uber
Year Founded: 2008
Date of IPO: May 10, 2019
Time to Exit: 10 years
Crowdstrike
Year Founded: 2011
Date of IPO: June 12, 2019
Time to Exit: 9 years
Slack
Year Founded: 2010
Date of DPO: June 20, 2019
Time to Exit: 10 years
The RealReal
Year Founded: 2011
Date of IPO: June 28, 2019
Time to Exit: 9 years
Peloton
Year Founded: 2012
Date of IPO: September 27, 2019
Time to Exit: 7 years
Although this is a small sample size, you’ll see that most of the unicorn companies that went public last year fell within the 7-10 year range, though there are always outliers, as we see with Tradeweb. Crunchbase also has some interesting data on the time it takes for a startup to exit via IPO, broken down by industry. Interestingly, business-to-consumer businesses tended to exit faster, while hardware and SaaS companies took longer. The data also found that companies founded before 2000 exited far sooner than their contemporary counterparts.
Why Are Exits Taking Longer?
Over the last twenty years, there has been a market shift. Startups are able to raise more capital privately, reaching massive market capitalizations, and delaying the need for a public offering. This means that early-stage investors often have to wait much longer for an opportunity to liquidate their assets. In the case of late-stage companies with interested buyers, shareholders may be able to sell shares on the secondary market to get liquidity sooner.
The Bottom Line
If you’re looking for fast returns, early-stage startup investments are not going to be a good fit for you. Startup investing can be a long, winding process that could ultimately end in a loss. If you do choose to invest, you must be prepared to hold on to that investment for the long-haul.
If startup investing is something you’re interested in, check out our current offerings or, if you’re an accredited investor, sign up to gain access to an array of early and late-stage investment opportunities offered under Reg D.
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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.
