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Startups with the Least Funding Have Done Best
Oct 18, 2016

Indian startups are facing tough times. Valuations are falling, venture capital funding is not easy anymore, competition has become fierce, and profits remain elusive. Many startups that were considering IPOs have had to rethink their plans.

In this situation, it is unlikely that we will see a flood of startup IPOs anytime soon. But what if there was a change in sentiment? If Indian investors get a change to put their money in such IPOs, should they? It would be instructive to find out how the many VC funded startups have performed in the US after listing.

Today's chart shows the gains from US startup IPOs between 2011 and 2015. Facebook has been excluded due to the fact that its huge size distorts the average numbers.

Clearly, the 20 startups with the least VC funding (only US$ 623 million) have done the best. In contrast, the 20 with the most VC money backing them, have lagged far behind.

What do we learn from this? It's simple. If a startup has a lot of VCs backing it, then it likely commands a big valuation even before the IPO. Thus retail investors looking to make a fortune would probably be disappointed.

It would be prudent to identify the right entrepreneur and the right business model in such cases, rather than looking at the amount of VC money that the startup has raised. Last but not least, IPOs that hit the market at sky high valuations are better avoided.

Data Source: Techcrunch

This Chart Of The Day was published in The 5 Minute WrapUp - A Three-Legged Stool Approach to Generating 3,600% Returns

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