Early Exits

Back in January, I wrote about the oncoming era of the “small exit“. I felt then (and still do) that the combination of capital efficiency, the bad fit between traditional VC and today’s young startups, the sheer number of startups vs. amount of available capital (especially here in Canada) all pointed towards small exits. Vancouver-based Basil Peters has written a book on this topic which I recently had the pleasure of reading.

His book Early Exits covers his considerable personal experience as a founder, VC and now angel investor. His thesis for the book is as follows:

“Today, the optimum financial strategy for most technology entrepreneurs is to raise money from angels and plan for an early exit to a large company in just a few years for under $30M.”

There are many reasons why this message likely resonates with today’s tech entrepreneurs:

– VC is getting harder to find. Funds are getting bigger and only want to do deals that require a lot of capital

– Its easier to generate “small” exits than big ones but small exits don’t interest VCs

– Putting a few million in your pocket as a founder can change your life

– As VC has gone through some challenges we are seeing more and more the impact and scope of angel investing

Basil lays out a compelling case for early exits. We all know that taking VC is no guarantee of success. In fact, Basil has shown that VC-backed companies have considerably longer time to exit and lower rates of success. There is no question, that his message is anti-VC. And since this comes from a former VC, we should take note.

Basil covers many important considerations for entrepreneurs and angels as they plan for their exits. Some highlights:

– Founder shares should vest over time with 1/2 vesting on exit (since up to 1/2 of the value creation comes here and all of it is realized here).

– Aligning on exit strategy can be the single biggest factor in determining whether founders actually realize the value in their shares.

I agree with both of these points, especially the latter. I have seen the complete paralysis and disfunction that comes from having stakeholders that are not aligned.

For someone who has spent the last 10 years raising VC, Basil’s book and message will not have me abandoning this market. The fact is: not all startups *should* raise VC. However, you don’t have to choose your path right away. You don’t have to decide between a big swing for the fences raise lots of $ strategy vs. an angel-fueled early exit play.

To me, the ideal strategy for most startups (especially in the web, where I spend most of my time) is to raise modest amounts, keep burn low, be positioned for the early exit, BUT if you feel you can and want to make a big play, then have the team, technology and traction that will enable you to fund it and go for it! In other words, have your cake and eat it too! This also enables you to go down the VC path should you choose to from a position of strength as you will have more of the elements that they look for in a deal. The best time to raise VC is when you don’t need it. So, building a business that does not depend on it can only help you if you decide to take VC down the road.

I definitely see the potential for early exits. This is in fact one of the big reasons why I scaled back from doing one startup at a time to taking on several: So that I could help finance, grow and sell startups that may never be big enough to need a full time in-house CFO. And will never be big enough to work with great M & A advisors that can increase their exit value.

If you have not done so already, I highly recommend you read Basil’s book. You can get it here.