Huge VC opportunity hiding in plain sight

“The average ‘enriched’ startup raised 44x more capital to get a 25 per cent better return,” according to the above controversial chart. Even more alarming is the revelation that U.S. VCs could increase their returns 36x, with less risk than they carry now. All they have to do is invest modest sums in Canadian start ups.

That’s what I conclude from a Founder Collective study of the relationship between the size of VC investments in start ups and the upside generated.

Founder Collective is a New York seed stage VC founded by successful entrepreneurs. Founder Collective partner, Eric Pailey, wrote about the study in a Techcrunch post titled Overdosing on VC: Lessons from 71 IPOs.

“The conventional wisdom in the startup community,” writes Pailey, “is that when building the very best companies, more capital can be leveraged to accelerate even greater growth. But does this ‘go big or go home’ approach stand up to scrutiny?”

Founder Collective looked at 71 tech IPOs from the last five years. They compared 9 companies that each raised over $200m and 9 companies that each raised under $34m and compared the returns, based on market cap.

To Pailey’s surprise — and mine too — “a well-stocked war chest doesn’t have correlation with success.”

For example:

  • The most enriched companies raised an average of $567M each to return $3.5B or 6X.

  • The most efficient companies raised an average of $12.9M each to return $2.8B or 218X.

What’s shocking is that the return on each dollar raised by efficient companies is 218X, while the return on each dollar raised by the best-funded companies is 6X.

By my math, the efficient start ups generate 36X more return on each dollar invested than their heavily-financed siblings.

How does Canada fit in?

Canada is lousy with efficient start ups that are starved for cash.

Shane Dingman wrote in The Globe and Mail that there are 4,100 active tech start ups in Toronto. Add in the vibrant communities in Montreal, Waterloo, Vancouver, and that number is closer to 8,000. It’s hard to get start ups off the launch pad anywhere, but its especially hard in Canada. The ecosystem’s resources for branding, distribution, sales — and growth capital — is weak. To survive, you must be efficient.

Just how bad is the growth capital situation?

Reuters reports that “the average VC funding round size in Canada now stands at about C$4 million, far behind the United States at C$17 million, the United Kingdom at C$13.7 million, and Israel at C$10 million.”

Smart U.S. VCs have begun to set up shop here. And that’s a story for another day.

Geoff Foulds
Geoff Foulds
What fascinates me are the edges. And nowhere are the edges edgier… the stakes higher… than startups. There are plenty of sources of friction, compression and tension among founders and financiers, engineers and marketeers. How do you mesh all the edges so they transmit power even when loads are heavy? That’s what I write about.

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