Analysis: Executive Experience Can Nearly Double Investors’ Rate of Return
An M13 analysis reveals that founding teams with executive experience can exit faster with less capital.
By Rob Olson
Last Updated: June 23, 2021
Published: April 9, 2021
Does it really take an average of 7-8 years for a successful startup to exit? What can early stage founders do to accelerate outcomes?
To better understand the potential impact of our venture model, we wanted to answer these questions and more.
After all, we started M13 with the belief that founding teams can execute faster with a higher degree of success if they’re able to take advantage of relevant expertise. We then purposefully designed M13 so that early stage founders get access to experienced executives they wouldn’t otherwise have the money to hire nor the time to vet, onboard, and manage.
When it comes to measuring leadership experience, information about an individual executive’s experience for example, how long they’ve been an exec is publicly available. Unfortunately, there isn’t readily available structured data around a founding team’s seniority and how early the founders bring on people with more experience as an operator or leader.
To find out if leadership experience significantly impacts startups’ success, we analyzed nearly 800 executives at more than 200 companies that reached a sizable exit (greater than or equal to a $500 million valuation) via an IPO on a U.S. exchange or an exit via M&A from 2004-2019. About 70% of the companies in our data set exited between 2016-2019, including notable IPOs like Spotify, Zoom, Uber, and Peloton. We decided to exclude companies in the biotech/life sciences space, as these companies follow a different growth trajectory from consumer tech and B2B tech and traditionally exit via IPO or M&A at a much earlier stage.
Here’s what our analysis of startups with successful exits revealed:
1. Of successful exits, the average actually is 7-8 years.
While there are other intangible variables for startup success, the basic equation is the time and capital required to achieve an exit and the size of that exit.
Our data set validates the widely accepted statement that successful exits take about 7-8 years:
But could a variable like relevant leadership experience actually accelerate the time to exit? We wondered:
Beyond time and capital, are there any factors like experience as a leader or operator that can have an exponential impact on the exit outcome?
And when is the right time for those human capital resources to be introduced to make that impact?
2. It turns out (less) time is (nearly double the) money.
Our analysis of startups with successful exits found that companies with multiple founders who have prior relevant leadership experience will exit 33% faster this earlier exit is coupled with an additional finding that they will have also raised 34% less capital. Combined, these two improvements can nearly double an investor’s rate of return.
According to our analysis, if a company achieves a $500 million exit in 4.7 years (or 33% faster than the average of 7 years) and if they exit having raised 34% less capital the theoretical IRR for a Series A lead investor ($10 million check for 15% starting ownership) improves by 81%:
3. Companies, including top performing startups, can exit 33% faster by adding people with relevant leadership experience early.
Our analysis of startups with successful exits shows that companies with at most one founder with executive experience exit in 9.6 years on average.
In comparison, companies with two or more founders with executive experience tend to exit in 6.4 years (33% faster).
What this means: Even if companies are doing everything right in other words, they’re in the top 25% of our data set (in terms of exit speed) with great founders, high-performing teams, a booming market, and flawless execution they still reduce time to exit when they have multiple founders with prior relevant experience as a senior leader or operator.
4. Not only do companies with seasoned founders exit faster, they also need to raise 34% less capital before exit—boosting IRR.
If companies already have great founders, high-performing teams, a booming market, and flawless execution, we found that layering on some prior relevant leadership experience early also allows that company to exit having raised less capital and with less dilution.
The baseline: On average, successful startups exit in 7-8 years after having raised $386 million.
We found that it takes an average of 7-8 years for a company to exit, after five to six funding rounds (with outliers).
On average, these companies will have raised $386 million, including exit.
Companies with little executive experience tend to exit having raised $466 million in funding.
In comparison, companies with multiple founders with executive experience tend to exit having raised $306 million in funding.
5. There’s still room for companies to benefit from adding relevant leadership experience early.
Executive experience allows companies to identify common pitfalls and hurdles proactively, see around corners, and apply common frameworks and practices. In turn, this helps companies save so much time.
Although companies realize the need for prior relevant leadership experience, our analysis of startups with successful exits found that they usually gradually build their executive team.
According to our data, these companies tend to ramp up C-level hiring linearly into IPO, no matter their size or their executive teams’ collective experience.
Four years before exit, on average, these companies have only 43% of the shared executive experience they will eventually have when they exit.
Even successful companies that start with the most executive experience still tend to add experience at the same rate.
In the two years since launching Fund II, M13 has helped our portfolio companies hire multiple executives in the C-suite but perhaps more importantly, we provide diverse executive experience via our Propulsion model when hiring full-time doesn't make sense.
Every day, our Propulsion partners five vertically-focused, full-time partners with over two decades each of executive experience in brand and communications, data, finance, talent and leadership, and operations support our founding teams.
“I'm proactively telling founders that I've never worked with an investor as helpful and supportive as M13,” says Northstar Co-founder Will Peng. “It feels like M13 is doubling our team size."
We’re dedicated to helping founders when they need access to relevant leadership experience the most in the early stages when making even the smallest adjustments in hiring, marketing, finance, data strategy, and operations can affect the trajectory of a startup. (In fact, if you adjust the trajectory of a rocket ship by 1 degree, you’re only 92 feet off course after a mile. But by the time you reach the moon, you’re off by 4,169 miles. Correcting course early matters.)
We’re still in the early innings, and we’ve barely scratched the surface with our research. For example, what about breadth versus depth of experience? We know experience comes in all different forms, but what works? What doesn’t? And what is the impact of greater diversity in executive leadership?
We know that in 2020, 21% of C-suite executives in corporate America were women, according to LeanIn.org. Now that we’ve validated certain variables in the basic equation for startup success, how can we as investors help ensure that there’s equal opportunity to gain relevant leadership experience in the first place?
After all, we’ve already seen that when we combine the mission and vision of our founding teams with the deep operating experience of our Propulsion partners, we truly are brighter together.
*Methodology: We used publicly available information from Crunchbase, Pitchbook, LinkedIn, and various news publications to look at 783 executives from 201 companies that reached IPO or exited via M&A between 2004 and 2019. Our data set includes U.S. stock exchange listings only (NASDAQ and NYSE) from various industries, excluding biotech/life sciences. We looked at 112 small-sized companies with an IPO valuation of $500 million to $2 billion IPO valuation, 73 medium-sized companies with an IPO valuation of 2.1 to 9.2 billion, and 16 large-sized companies with an IPO valuation of $11 to $82 billion.