Exits

A bus stop – but no bus

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I read an article this morning that got me thinking about exits – though that was not the intention of the article (http://benariltd.com/2017/10/a-happy-ending-when-the-bus-never-comes/)

It describes the situation outside a home caring for those with dementia. Sometimes the residents manage to get out – and a search will ensue.

An employee of the centre got thinking about how when residents escaped, they often managed to hop on a bus. This observation led to a solution. The Senior Centre built a fake bus stop right in front of their facility. A confused resident who manages to leave the centre sees it right away and sits down to wait for a bus. As they sit on the bench at the bus stop they relax and forget where they were going. Soon someone from the Senior Centre arrives and calmly asks if they’d like some tea, and takes them back into the centre and settles them back into their quit routine, thoughts of escape forgotten.

Got me wondering – how many of our companies are building fake bus stops to keep us investors happy, rather than real exits?

In the last few weeks I have seen two cases where it is clear the founders have become comfortable running their business, and have no intention of actively seeking an exit. At best they pay lip service to the concept, making the right noises if and when the investors bring it up.

Its the investors that have allowed this to happen, but not consistently and regularly, from the very first board meeting, measuring company performance against KPIs designed to build acquirer value.

If after making an investment you have ever wondered  “when should be start planning / talking about the exit?” you have probably already fallen into this trap.

The answer of course is – befor you make the investment, and consistently thereafter. Almost every board decision you are involved in – from who to hire and what customers to go after, should be considered against what will add the most value in the eyes of your exit partners.

Otherwise you might be sitting on that bench for a long, long time.

The Myth of the VC Series A for Angel Funded Companies (or any others)

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Very few Angel investments receive follow on funding from venture capital firms.

According to the University of New Hampshire, Centre for Venture Research there were around 75,000 Angel investments in the USA last year. Yet the PWC Moneytree report recorded just 5,004 VC deals (of which 33% were in the San Francisco area). So even if every VC deal had previously had Angel funding, that would still be a tiny fraction of Angel backed companies going on to secure any form of VC funding.

CB insights reported that 68% of USA and European successful technology company exits had received no VC funding before the exit.

These numbers are supported by the research in Scott A. Shane book “Fools Gold? The Truth Behind Angel Investing In America”, (Oxford University Press, 2009). “Fools Gold? is possibly the first book to bring together hard data on angel investing within the USA from multiple governmental and academic sources, including the Internal Revenue Service, the US Census Bureau, the Federal Reserve, the Kauffman foundation and many others. The book so encourages Angels to invest as part of an Angel group, and encourages policy makers to invest in supporting the creating of angel groups. This to facilitate a portfolio style of investing and the pooling of investment funds to provide larger amounts of funding over a longer period than would be possible as a solo investor.

Fundamentally Angel investors need to plan for the Whole Life funding of their companies. They cannot just assume that future funding will be provided by some as yet unidentified VC. They must therefore crowd in as many investors as they can into the first and other early rounds, even where this means each individual investor investing less into each deal than they could, or would like to. Only in that way will there be sufficient future reserves of capital to fund the likely 4 or 5 rounds typically necessary to get to a successful exit.