By Paul Jones

Savvy entrepreneurs understand that raising risk capital is “all about the exit.” More specifically, selling early investors on a startup deal is all about convincing them that for every $1 they put in your deal they have a good chance of getting $10 or more back.

We live in an age (unthinkable, really, even as recently as a decade back) in which there are literally hundreds of private venture-backed companies with $1 billion and up (way up, in fact) valuations. So-called Unicorns (and more recently Decacorns.) And, more recently, at a time when even the more … dare I say “speculative” … of those strange animals are finding their way to the public markets via blind pools (aka SPACs). It’s easy for entrepreneurs, circa 2021, to think that if not every deal, at least their deal has Unicorn/SPAC written all over it.  Too easy.

As much as Unicorns and SPACs seem to dominate the business news cycle of late, the good folks at Allied Advisors recently did a study of technology sector exists over the last five years and found that 90% of exits took the form of M&A deals at a valuation of less than $100 million.

A few things about that figure: For anyone paying close attention over the last 50 or so years of the venture business, it’s not a surprise. Merger and acquisition has always been the dominant exit vehicle, while the media focus has always been on the largest, usually public, exits. The figure also surely includes a fair number of exits that did not produce 10x returns for early investors. Finally, it suggests that even in the age of the Unicorn/SPAC, most startup entrepreneurs should think about learning to walk, exit-wise, before they assume they can run with the Unicorns.

Those three observations together suggest something most entrepreneurs should think about when they start building their financial models and formulating their exit strategies: It’s ok to speculate about your future as a Unicorn, but plan for an earlier, less grand exit.

In practical terms, what planning for the real-world means is mostly about making sure that your financial model and exit strategy are mutually supportive right from the get-go. More to the point, it means carefully balancing your early-stage risk capital needs – the stage when the risk is highest (so valuation lowest), and the opportunity least quantifiable – against more modest exit eventualities.

By way of example, if you are thinking you need $10 million of 10x+ return potential venture dollars, you should recognize that even if you gave up one-half of your startup’s equity upside to your investors, and suffered no additional pre-exit dilution, you’d need a minimum $200 million exit to achieve the investors’ minimum 10x return bogey. If you don’t think about that reality, you can be sure your investor will. So, perhaps you should spend a little more time and see if there might be a way to spread that $10 million out over multiple rounds of (ideally) smaller to larger size as the risk/required-return algorithm trends down.

It’s tempting, in this Age of the Unicorn and epoch of the SPAC to see a Unicorn dancing with a SPAC in every startup story, even more so yours. And if you come to your startup with the right track record (building and exiting one or more home-run exits before, by way of example) you might even get investors to sign your dance card. For most entrepreneurs, however, starting with a much more common – smaller and quicker – exit strategy is much more realistic. It is a much easier sell to a much larger universe of potential investors who can’t write $100 million checks even if they wanted to.

And besides, if, as your startup evolves, those Unicorns start coming into sharper focus, you can always adjust your expectations up – something that is a lot easier than scaling them back.

Jones is an attorney, investor and veteran entrepreneur who is of counsel to the Michael Best law firm. His blog posts can be accessed here.