Founders: Don't Be Afraid to Sell Early
I’ve seen countless startups wrestle with the decision of when to exit. While founders often aim for billion-dollar valuations, the reality is that waiting too long can expose them to significant risks, especially in later funding stages where failure rates are alarmingly high. Here’s why selling earlier might be the smarter move:
- High Late-Stage Failure Rates: Startups face declining success rates as they progress to Series C or D, with only about 50% advancing past Series C and even fewer achieving profitable exits. Companies like Tally and Rad Power Bikes failed despite exceeding $100 million in revenue due to unsustainable burn rates and funding challenges.
- VC Incentives vs. Founder Risks: VCs prioritize portfolio returns and often push for inflated valuations, but this strategy disproportionately risks founders’ personal wealth. For example, WeWork’s aggressive scaling led to its collapse in 2024 despite billions in revenue.
- Strategic Exits Are Better Options: Selling earlier can attract strategic acquisitions with favorable terms, as seen in industries like fintech and robotics. Founders who focus on profitability or sustainable growth gain more leverage during negotiations and avoid the pitfalls of overvaluation or operational inefficiencies.
Founders often face a critical decision: when to sell their company. While venture capitalists (VCs) may push for aggressive growth and higher valuations, founders should carefully weigh the risks and rewards of waiting for later funding stages like Series C or D. The harsh reality is that many startups fail to achieve profitable exits despite raising millions in funding. This article explores why selling earlier than most VCs recommend can be a prudent strategy for founders.
The Harsh Realities of Late-Stage Funding
1. Declining Success Rates
Statistics reveal a sobering truth: only about 50% of companies that reach Series C funding successfully advance to the next stage, and by Series D, the success rate drops even further to around 10%. Despite raising substantial amounts of capital, many late-stage startups fail to achieve profitability or secure an exit. These businesses often burn through cash at unsustainable rates, making them vulnerable to market shifts and investor pressure.
2. The Illusion of Growth
Late-stage funding rounds, such as Series C or D, are often used to scale operations aggressively, expand into new markets, or prepare for an IPO[9]. However, this growth comes with significant risks:
- Dilution of Ownership: By the time a company reaches Series C, founders may have given up substantial equity to investors[9].
- Pressure for High Valuations: VCs push for inflated valuations to secure higher returns on paper, but this can lead to unrealistic expectations and increased scrutiny[9].
- Cultural Shifts: Rapid scaling often erodes the original startup culture, making it harder to maintain focus and agility[9].
3. Burn Rate Dependency
Many startups rely heavily on VC funding to sustain high burn rates. Without consistent revenue growth or profitability, these businesses risk running out of cash if additional funding rounds fail[3]. This dependency creates a precarious situation where founders must constantly chase capital instead of focusing on building a sustainable business.
In 2024, several high-profile venture-backed startups that had achieved significant revenue milestones—some exceeding $100 million—ultimately failed due to a combination of economic pressures, unsustainable business models, and an increasingly challenging funding environment.
Below are examples of companies with founders certainly smarter than me and perhaps even you yet had their dreams evaporate:
1. Tally
- Industry: Fintech
- Revenue Milestone: Estimated over $100 million in revenue before collapse.
- Key Issues: Despite raising $172 million in funding and achieving substantial growth, Tally was unable to secure additional capital to sustain operations. The company specialized in helping consumers manage and pay off credit card debt but faced challenges with unit economics and a tough fundraising environment[1][2].
2. WeWork
- Industry: Real Estate/Shared Workspaces
- Revenue Milestone: Over $3 billion in annual revenue at its peak.
- Key Issues: WeWork’s long-standing financial troubles culminated in its bankruptcy filing in 2024. Despite raising $16 billion in debt and equity, the company was burdened by unsustainable operating costs, massive debt, and a flawed expansion strategy. Its failure highlights the risks of aggressive scaling without profitability[1].
3. Northvolt
- Industry: Battery Manufacturing
- Revenue Milestone: Estimated at hundreds of millions annually before collapse.
- Key Issues: Northvolt, once a European leader in battery production, filed for Chapter 11 bankruptcy after raising over $14 billion in funding. The company faced operational setbacks, including production delays and safety concerns, as well as financial challenges like $5.8 billion in debt and only $30 million in cash on hand[3][7].
4. Mindstrong
- Industry: Digital Health/Mental Health Tech
- Revenue Milestone: Significant growth but exact figures not disclosed; likely exceeded $100 million based on valuation and funding levels.
- Key Issues: Mindstrong raised over $160 million to develop a digital mental health platform but struggled with market adoption and economic pressures. It ceased operations in March 2024, selling its technology assets to SonderMind.
5. Rad Power Bikes
- Industry: E-Bikes
- Revenue Milestone: Estimated over $100 million annually at its peak.
- Key Issues: Rad Power Bikes faced challenges with scaling operations profitably and maintaining quality control amid supply chain disruptions. Despite being a leader in the e-bike space, it could not secure additional funding to continue operations[2].
6. Kevin
- Industry: Fintech (Payments Infrastructure)
- Revenue Milestone: Significant growth but exact figures not disclosed; likely exceeded $100 million based on valuation and market presence.
- Key Issues: Kevin aimed to replace costly card transactions with account-to-account payment infrastructure but faced financial mismanagement and regulatory issues. The Bank of Lithuania revoked its payment license due to accounting failures, leading to insolvency.
7. Embodied
- Industry: Robotics (Emotional Support Robots)
- Revenue Milestone: Likely exceeded $100 million based on funding rounds and product pricing.
- Key Issues: Embodied raised $75 million to develop "Moxie," an emotional support robot for children, but failed to secure critical funding for continued operations. The product's reliance on cloud connectivity also limited its scalability[3].
Key Takeaways from These Failures
1. Aggressive Scaling Without Profitability
Many of these startups pursued rapid growth fueled by venture capital without achieving sustainable unit economics or profitability.
2. Funding Environment Pressures
The slowdown in venture capital funding significantly impacted startups reliant on external financing, particularly those with high burn rates.
3. Operational Challenges
Companies like Northvolt and Rad Power Bikes struggled with operational inefficiencies, supply chain disruptions, or regulatory hurdles that undermined their ability to scale effectively.
4. Overvaluation Risks
Inflated valuations often led to unrealistic expectations for growth and profitability, ultimately contributing to the downfall of companies like WeWork.
These examples underscore the importance of balancing growth ambitions with financial sustainability and operational stability as startups navigate late-stage funding challenges.
The VC Perspective: A Misalignment of Incentives
1. VCs Prioritize Portfolio Returns Over Individual Outcomes
Venture capitalists operate under a portfolio model where they expect most investments to fail while a few generate outsized returns. For this reason, VCs often push founders to aim for billion-dollar valuations, even if it means taking on excessive risk[3][4]. This strategy benefits VCs by improving their ability to raise future funds but exposes founders to significant personal financial risk.
2. The Real Estate Agent Analogy
VCs can be likened to real estate agents: they benefit disproportionately from incremental gains while founders bear the brunt of the risks. For instance, a 5% drop in valuation may have minimal impact on a VC's overall portfolio but could represent millions in lost paper wealth for a founder. This misalignment underscores why founders should prioritize their own financial security over chasing lofty valuations.
Why Selling Early Makes Sense
1. Maximizing Personal Wealth
Founders often underestimate how little their lifestyle will change between owning most of a Series A company versus holding diluted shares in a later-stage startup. Selling early allows founders to lock in significant financial gains without exposing themselves to the high risks associated with late-stage funding.
2. Avoiding Burnout and Risk
Running a high-growth startup is exhausting and fraught with uncertainty. By exiting early, founders can avoid the stress of managing escalating burn rates and navigating complex investor dynamics. An early exit also provides a safety net against market downturns or failed funding rounds.
3. Strategic Acquisitions Offer Better Terms
Selling during earlier stages often attracts strategic acquirers willing to pay a premium to eliminate competition or gain access to unique technology[7]. These deals can provide more favorable terms than waiting for an IPO or larger acquisition at a later stage.
4. Profitability as Leverage
If your business is profitable or nearing profitability, you hold more negotiating power during acquisition talks. Profitability signals stability and reduces reliance on external funding, making your company more attractive to buyers[1][7].
The Importance of an Exit Strategy
1. Start with the End in Mind
Planning your exit from day one ensures alignment among all stakeholders—founders, investors, and advisors. A clear exit strategy helps avoid conflicts over timelines and goals while providing a roadmap for decision-making[1][4].
2. Mitigating Risks Through Early Planning
An exit strategy acts as a safety net against unforeseen challenges like market shifts or operational setbacks. By considering potential exit scenarios early on, founders can make informed decisions about funding and growth strategies[7].
3. Balancing Ambition with Realism
While aiming for massive success is admirable, founders should set realistic goals based on their personal circumstances and risk tolerance. Selling early doesn’t mean limiting ambition—it means securing financial independence while leaving room for future endeavors.
Lessons for Founders
1. Be Selective About Your Investors
Choose VCs who align with your long-term goals and are open to early exits if they make sense for the business. Some investors may torpedo acquisition offers in favor of chasing higher valuations; avoid these at all costs[3][4].
2. Focus on Sustainable Growth
Prioritize building a business that can achieve profitability rather than relying solely on external funding. A profitable business gives you more options—whether it’s securing bank loans or negotiating better acquisition deals[3][7].
3. Know When to Walk Away
Pay attention to key inflection points in your business’s growth trajectory:
- If revenue growth slows significantly.
- If achieving profitability feels increasingly out of reach.
- If market conditions make future funding rounds uncertain.
These are signs that it may be time to sell rather than doubling down on risky growth strategies.
While venture capital can provide valuable resources for scaling startups, it often comes with strings attached that prioritize investor returns over founder outcomes. The statistics are clear: most startups fail to achieve successful exits at later stages despite raising millions in funding[2][5][8]. For this reason, founders should consider selling earlier than most VCs recommend—especially if their business relies on high burn rates or faces slowing revenue growth.
By planning your exit strategy from day one and focusing on sustainable growth, you can maximize personal wealth while minimizing risk. Remember: your ultimate goal as a founder is not just to build a successful company but also to secure financial independence and personal fulfillment on your own terms.