November 7, 2020 | Blog
According to this study, the number of prior businesses going public increases the next business’ revenues by an average of 115% for each. Going public will be referred to as an “exit” in the study.
The study also found that the “increase in expected revenues indicates that those entrepreneurs who are very successful may indeed move up to bigger opportunities and higher challenges, and quite often achieve them.”
What this means is that if an entrepreneur has built and exited one business (1 prior exit) with $100m in revenues, the revenues of their next successful business is expected to be $115m.
The table below shows how each prior success increases the expected revenues of the successful entrepreneur’s next venture.
|No. of Prior Exits||Expected Increase in Next Company Revenues|
For each prior success it compounds. To demonstrate, let’s take a successful entrepreneur with 5 successful exits. The expected revenue of their next business will be double that of their first successful business because each success compounds at 115% to the power of 5 (1.15^5 = 201%).
So, if the revenue of their first successful business was $100m, then their next business is expected to generate at least $201m in revenue.
The graph below shows the percentage increase in expected revenues for a successful entrepreneur’s next business depending on the number of previous exits.
Larger revenues means larger valuations, which results in larger returns for investors. So by investing in successful entrepreneurs, investors can make more money, more often.
In my previous article, successful entrepreneurs are 48% more likely to succeed, I referred to a Harvard Business School finding that the success rate for already-successful entrepreneurs building a new company was 34%, while first-time and failed entrepreneurs was 23%.
Simply, if you have a portfolio of 100 companies being built by successful entrepreneurs, you’ll have 34 winners. Let’s call this Portfolio A.
Whereas, if you have a portfolio of 100 companies being built by first-time and failed successful entrepreneurs, you’ll have only 23 winners, 11 less successful companies. Let’s call this Portfolio B.
Now, to illustrate a point, let’s say that the average successful company makes $100m in revenue before it is acquired, merged or listed on a stock exchange. I am using this number because a unicorn company, one that is valued at $1bn, usually has $100m in revenue (approximately a 10x market capitalisation to revenue multiple).
So, in Portfolio B, you can expect 23 companies with $100m revenues. This equates to total revenues of $2.3bn.
However, in Portfolio A, you can expect 34 companies to have revenues of $115m because the average revenues of a successful company is $100m, and all 34 entrepreneurs building these companies have had at least 1 prior success. This equates to total revenues of $3.91bn.
Therefore, the difference between total revenues in Portfolio A and B is $1.61bn ($3.91bn – $2.3bn).
This $1.6bn difference has positive implications on returns for Portfolio A because revenue multiples like the unicorn one described above are used to value companies.
Using the 10x market capitalisation to revenue multiple, this extra $1.61bn in revenues in Portfolio A adds approximately $16.1bn ($1.61bn x 10) to the valuations of the 34 successful companies.
This means that the investor who holds Portfolio A will make bigger returns than the investor in Portfolio B because the larger revenues translate to bigger valuations.
As a result, larger revenues means larger valuations, which results in larger returns for investors.
So by investing in successful entrepreneurs, investors can make more money, more often.
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