Last week I posted some data from our portfolio about the pace of seed-stage financings. And it sure looked like things are speeding up.
This week, I thought we'd take a look at the speed at which our companies generate revenue. Specifically, we took a look at the 14 investments we made in our first fund (which was a 2005 vintage)...and wanted to know how many of them generated at least $250K in revenue in the 18 month period post-investment. (I recognize that $250K and 18 months are arbitrary thresholds - but hey, we had to choose something). And it turns out that just three of the fourteen companies in our 2005 fund (21% of the portfolio) generated revenues in excess of $250,000 during the 18 month period. I was surprised to see how long it took those companies to generate revenue. Especially because that fund has some really incredible companies in it. It includes Bazaarvoice (who recently filed for an IPO ). It includes SayMedia (formerly VideoEgg) who currently employs over 300 people in 10 different cities across the globe. And it included Like.com (which was acquired by Google).
Then, we looked at the companies in our most recent fund (a 2010 vintage). Specifically, we took a look at the 32 companies that have been in the fund for at least six months (since we didn't want to include the pre-launch companies we just funded). And it turns out that 19 of the 32 companies in our most recent fund (around 60% of the portfolio) have already generated over $250K in revenues.
I was not expecting such a dramatic increase -- especially because while our fund size and investment team has increased over the years, our investment strategy has not. Our average initial investment remains under $500,000. We continue to invest in a company's first round of funding. We still are focusing on capital-efficient internet startups. So what's changed?
The numbers might influenced by the fact that we are bullish on online commerce -- and ecommerce companies typically have a shorter path to revenue. It might be that the last six years have seen a dramatic growth in monetization platforms (whether it be advertising technologies, mobile platforms, virtual currencies, etc) that reduce the friction/cost/time to generate revenues. It might be because the cost and technical complexity to start a company has decreased so much, companies today are able to get to market much faster (and possibly raise money much later) than they previously did. It also could be that First Round has just gotten better at investment selection (though given the size of our woulda coulda shoulda list, I'm not too sure about that -- and I'm also not aware of any data that shows that a company's time to revenue generation corresponds to the size of a company's success).
Whatever the reason, I was surprised to see that companies today are 3 times more likely to get to $250K in revenue during an eighteen month period than they were six years ago.
Disclaimer - these results are based on a small sample that only consisted of one fund's experiences. This post is not intended to claim statistical significance -- just an observation of what we're seeing in our fund.