When's the right time to join a startup: Series A, B, C or later?

Joining a series A startup has risks

The dream is alive: find a young, promising startup, put in four years of hard work, and end up a deca-millionaire. It sounds nice, unfortunately it's an incredibly unlikely scenario. Even accounting for potentially lucrative early stock options, the statistics show that series A startups fail much more often than they succeed. In my opinion, later stage startups are a much better balance of risk and reward, with a similar depth of experience and culture that people are looking for at startups. 

The myth of joining a startup: the series A success

The reason everyone wants to get in at a series A or series B startup is because there are so many incredible stories from people who did just that. My personal favorite early startup employee story is Doug Edward's "I'm Feeling Lucky", which documents his experience as Google employee #59 (stock options and all). To make a 150 page book short, he makes decamillions in 4 years off of his stock options, and witnesses technology history in the making to boot.

There are so many stories like this that it seems normal, it seems common... so common you find yourself wondering what you're doing working at any place besides a small startup. The problem is that these early stage success stories AREN'T normal... in fact they aren't even really common. 

Don't believe me? Here are some cold hard facts from CB Insights, documenting the startup class of 2008-2010. Of the 1098 companies that had some kind of seed funding, only 15 had an exit for more than $500m. That's barely 1%. Of those that reached series A (500~), only 307 made it to Series B. Take a look at the funnel below for more info:

The most important information in this graphic is the 70% number in the bottom left hand corner. 70% of the 1000 companies that were seed funded in the 2008-2010 timeframe had no exit. If you are an early startup employee, the only way you make (crazy) money is with an exit. What's even worse, if you look at the exit numbers you can see that for most companies, the exit figures are very small, in the $50-$100m range.

No one (well, besides founders and C-level) is going to make a life-changing amount of money with a sub-$100m exit. Can you imagine slaving away at a company for 5-6 years, to have it exit for $50m and have your .5% only be worth $250,000 (total, BEFORE tax).

That sounds like a lot of money, but when Google and AWS are hiring tens of thousands of people who make $100k per year in stock alone, it's not much at all. The opportunity cost and risk of working at a series A startup is way too high when the risk-free option (Google, AWS, etc) is paying so well. 

When is a good time to join a startup? After Series B, C, or later?

So... if I am so smart and I have this figured out so well, when would I join a startup? As you would imagine, this isn't an exact science, but I do have some ballpark figures to guide my own judgement. 

What's clear from the graphic above is that later stage startups are much more likely to have a successful exit at significant valuation. If you look at the Series D (5th round including seed) numbers above, you can see that there was a total class of 60 companies. Of those companies, 10 went on to reach Unicorn status, and 7 exited before raising a Series E. This means that there was a ~28% success rate (financially) for those who joined those Series D companies. Of course, for the Series E the numbers were even more impressive with 50% of the class ending up in the Unicorn group.

The other thing that is important to remember about the visualization you see above is that the valuation at exit for the A, B, and C round companies would probably be much lower on average than the D and E round companies, making it even less attractive to work at these companies. 

To summarize all of this, in my opinion the best time for me to join a startup is right before they raise their Series D round. Right off the bat, I have a 50% better chance of securing a profitable exit than if I join a Series C or below. 

A real life example to back up my statistics: Uber

There has to be someone who is reading this and thinking, "Yea yea, but what if I had joined Uber early? Wouldn't I miss my meal ticket by joining so late." First of all, as I already established, the chances of any series A or series B company ending up a Unicorn are in the 2-3% range... so it's highly doubtful that anyone would get lucky enough to find the next Uber. 

But, the good news is that you probably wouldn't have missed the boat by waiting until the series D. Uber raised $1.7b in 2014 for their series D at a $17b valuation. Currently, they are valued around $60b, meaning that the value of the initial stock grant would have grown over 300%. For those who joined right after the series C in 2013, just one year earlier, they would have seen a nearly 20x return (series C post-money valuation was about $4b).

To summarize...

It's almost impossible to tell what the next game changer will look like. That's why the VC game is so tough, and why it doesn’t makes sense for me to join a series A or series B startup unless I get in as a founder. In order to have a better chance of turning startup equity into real, non-Monopoly money, the best time for me to join is around the series C or series D time range... in fact right before the series D may be the best spot of all for me. Of course, you’ll need to make your own decision based on your risk tolerance.