After 18 Months, Your Investment Probably Isn’t Getting Marked Up

When you invest in a startup, one of two things is likely to happen: at some point, the startup investment will be marked up (i.e., raise a subsequent priced round at a valuation increase or exit at a gain, which we will call a “winning” investment), or it will be a losing investment and never get marked up. Of course, you don’t know which category your investment will fall into. If you did, you’d never make a losing investment.

However, the odds that an investment will be a winner decline with each passing month that the investment is not marked up. That’s because some fraction of winning deals get marked up with each passing month—while a losing investment is never marked up.

Based on AngelList’s latest quarterly figures, we can graphically show the decreasing likelihood that a seed or Series A investment will ever be marked up, given the investment hasn’t already been marked up a certain number of months after it was made:

18 months after closing, a Series A investment that hasn’t been marked up yet is more likely to never be marked up than to be marked up. Seed investments, because of their higher baseline rate of failure, cross this threshold even faster—at just 12 months.

In a formal mathematical sense, an event is most informative when its probability of occurring is exactly 50/50. What’s surprising about these values is that they reach their maximally informative level (that is, the point in time where it is equally as likely that the investment will be marked up or never get marked up) so fast. An investment in a seed-stage startup can easily take a decade to get to a realized exit—but markups can be predictive of the directional outcome of a startup investment after just one year. Relative to other VC metrics like internal rate of return (IRR) or exits, markups can be a rapidly useful measure of investment success.

Of course, no measure is perfect, and there are at least two kinds of startups that markups mistreat. The first are the small number of startups that, because they raised enough money relative to their burn, simply don’t need to raise money within the typical four-year window that we consider for investment success. These startups may also be “winning” investments, but they would be classified as “losing” investments in a markup-based scheme because they would not be marked up in a timely manner. 

The second, more common, kind of startup activity that this markups methodology might miss are startups that raise flat rounds, where the price-per-share does not change from its last mark. Put another way, in a flat round the price is not marked up and so the round is not considered a markup. This may be incorrect—we don’t have enough data to know whether companies that do flat rounds behave more like winning or losing investments—but given the increasing prevalence of flat rounds in the current venture downturn, we should be able to know within a few years.

To summarize our findings:

• Markups (or a lack thereof) can be an early predictor of the outcome of a startup investment.
• If your seed or Series A investment isn’t marked up after 18 months, it’s more likely than not that it will never be marked up.
• Our markup measure may not be predictive for startups that have long periods of time between funding rounds or for startups that raise flat rounds.

For more data on early-stage VC, check out our Real-Time Startup Valuation Dashboard or read our latest quarterly State of Venture report.