Sometimes Smaller Investments Can Lead to Bigger Payouts

It goes without saying that you want your company to be healthy. That’s the most important reason you should research potential employers thoroughly, before you decide to accept a job offer.

Understanding the ins and outs of a startup’s finances can be tricky in the best of circumstances, but now comes something to make your evaluation a tad more complicated: A report by Exitround–a marketplace for buyers and sellers of technology companies in the small and mid-markets–finds that raising more money may not always be a company’s best option. That’s a counterintuitive conclusion that’s sure to have a lot of people furrowing their brows.

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Exitround looked at companies with exits of less than $100 million. You’d think that the amount of money invested in a startup would lead to a higher exit price. But it turns out that companies that raised between $2 million and $3 million were worth more than those that raised between $3 million and $5 million. The same was true for companies that raised between $5 million and $10 million: Their exits were worth more than firms which raised between $10 million and $50 million.

The study also found that companies with the best exits were more than four years old, another indicator that those joining startups shouldn’t expect a get-rich-quick scenario. Companies that exited after more than four years, the Exitround report says, increased “substantially in price.”

One other point: Investors who put money into companies early on can see a big payoff. The report showed that those that raised relatively small amounts of capital generated substantial returns for those investing as seed funders. Michael Kim, founder and Managing Partner of fund of funds Cendana Capital, said the study shows that “meaningful returns can be generated by capital efficient startups early in their life.”

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Chart: Exitround