Big Tech needs more capital than ever

It’s easier than ever to start a tech business, but harder than ever to be the biggest.  It’s also expensive. We did an analysis looking at the amount of capital raised by 147 tech companies prior to going public.  These are some of the biggest players in their respective industries.


Observations are below.


Being big takes more money than ever. Total capital invested has gone up significantly over time regardless of the industry.  For instance if we look at the last 20 software IPO’s, median capital invested was $258mm whereas the first 20 had median capital invested of $80mm.  As a founder, don’t feel the need to raise a ton of cash: being big and being successful are not the same thing and there are plenty of very happy investors and founders with cash efficient, smaller businesses (it’s all we do); however, if your goal is to be the biggest player in the space, it’s going to take a lot of capital.


The cash need differs by industry.  Given the data spans very diverse industries with different capital needs, it’s appropriate to look at each industry separately.  For instance, because hardware companies are generally profitable quickly, the median equity raised was only $75mm (and $32mm of debt) whereas social media companies had a median of $1.8bln equity.    Marketplaces took $280mm and ecommerce took $83mm (ecommerce tends to be profitable quickly so again, less equity is needed).


No debt.  Notice debt plays a very small part in any tech company’s capital structure except for hardware, which had on median $32mm of debt versus $75mm of equity.


Cash need has grown with time.  The oldest companies on the list like Amazon, Apple, TiVo, and 1800 Flowers required very little capital relative to peers today.  Equity raised by these 4 companies was $10mm, $12mm, $12mm, and $20mm respectively.  This drives home the point that building a successful business takes more cash than ever.  Even looking within the same industry, you can see stark differences between old companies and new: Fitbit, GoPro, and Roku have all raised over $200mm each whereas Garmin went public in 1999 on only $63mm of capital raised.


Profitability minimizes investor need.  Companies that reach profitability faster need less capital.  We can see this when looking at ecommerce relative to more capital intensive businesses like Marketplaces.  E-commerce companies need to reach profitability quickly because the repeat sale can be infrequent and unpredictable.


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