Elizabeth Pollman is Professor of Law and Co-Director of the Institute for Law and Economics at the University of Pennsylvania Carey Law School. This post is based on her recent paper forthcoming in the Duke Law Journal. Related research from the Program on Corporate Governance includes What Matters in Corporate Governance? (discussed on the Forum here) by Lucian Bebchuk, Alma Cohen and Allen Ferrell.
Venture-backed startups famously aim for “exit.” On the path to building great companies, entrepreneurs raise rounds of venture financing and assemble a team to develop an innovative product or service that can grow fast. Success for startups is often framed as reaching a liquidity event, or exit, that provides financial returns and rewards to the investors, founders, and employees. There are two main ways to do this: sell the company or go public. Each of the two paths to a successful exit—going public or an M&A sale—have been the subject of significant scholarly examination and public debate in recent years.
Most venture-backed startups, however, never reach either of these paths, or if they do it is in a state of distress. Approximately 75% of venture-backed startups fail – the number is difficult to measure, however, and by some estimates it is far greater. In general, a startup can be said to fail when it ultimately falls short of reaching an exit at a valuation that would provide a return to all equity holders. This can occur for a wide variety of reasons—such as running out of cash, problems in the team, shortcomings with product development or business model, getting outcompeted, a lack of market need, or changed circumstances. The participants may not expressly call this a “failure”—and indeed they may work mightily to find a “soft landing” that allows them to characterize it otherwise—but it is distinctly an end that is not a going-public transaction or M&A sale that results in returns to all equity holders.
