Don’t Ride It Over the Top Nyenrode Business Universiteit, Amsterdam

This was a presentation to a hundred Dutch investors and CEO’s at the Nyenrode Business Universiteit just outside of Amsterdam. In this video I describe the critical importance of exit timing and the dramatic effect it can have on investor returns and the lives of entrepreneurs.

This talk included:

  • How the internet has accelerated everything and shortened company lifecycles
  • Entrepreneurs now have “Weekenders” where they build entire companies in a weekend
  • Ideally, a company would start the exit process 12 months before the peak in value
  • There are logical reasons why, if a company misses the ideal time to exit,
  • There’s a significant probability it won’t just exit for less, but will never exit at all
  • Some of the reasons this happens much more often than people realize include:
  • Over-investment by VCs, Competition, Negative momentum and Waves of Consolidation
  • Like many parts of life, and business, “timing is everything” with exits
  • Timing our exits better can significantly improve angel investor portfolio returns
  • And for entrepreneurs can literally change their lives

Exit Strategies for European Tech & Life Sciences Companies – Artic 15, Helsinki

At the Artic 15 Conference: Exit Path in Helsinki, I describe exit strategies for European technology and life sciences companies. And explain why I believe growing a knowledge-based company in Europe today can be better than building one in Silicon Valley.

Highlights include:

  • Why it used to be easier to grow a company in America
  • Yes, raising capital in Europe is more challenging and why
  • Fortunately, capital is less and less important today
  • Technology also makes face-to-face communication less important
  • Virtual companies are more competitive
  • Today, I believe most of Europe is a better place than Silicon Valley to build a tech or life science company
  • It all comes down to where knowledge workers want to live
  • Now most companies can be anywhere
  • The market for exits (M&A transactions) is global
  • Today, exits aren’t really different in Europe

Improving Returns for Angels and Entrepreneurs – Element8 Angels, Seattle

This video is a talk I gave at the Element8 angels workshop in Seattle: Investing a World With Few Exits.

Some of the key points from my talk:

  • I believe only 25% of all companies that could have been sold actually end up successfully exiting
  • If a company misses the ideal time to exit, then the most likely result is that it will fail completely
  • After seeing this happen over and over again I started to recognize a few patterns
  • I’ve identified five categories of these failure mechanisms:
  • Over-investment by VCs
  • Competition
  • Intellectual property infringement
  • Negative momentum
  • Waves of Consolidation
  • This talk describes in detail the failure mechanism due to patent infringement
  • In my opinion, if you have a good patent,the only reasonable strategy is to sell the company
  • As soon as possible after the patent is granted,
  • Or when you have disclosed the technology – whichever is sooner
  • If you are a small company, the risks of owning a good patent are not a reasonable business, or investing, decision

Double Your Exits – 6th Angel Summit Dunedin, New Zealand

I believe Angel Investors could double their number of exits. This would double the returns on their portfolios. Yes, double. This video is from the 6th Annual Angel Investor Summit, Dunedin, New Zealand.

Double Your Exits includes:

  • OK, I’ll say it…Most angel investors lose money
  • We need to talk about it and I know we are already improving
  • Generating a consistent return on any investment portfolio isn’t easy
  • “To learn to be a VC takes 6 to 8 years and costs $20 million”
  • Angel investing is actually more difficult than Venture Capital investing
  • Angel investing is still quite new – about where Venture Capital was in the early 1980s
  • Our biggest problem is a lack of good data
  • From “An Evaluation of the Venture Capital Program in British Columbia”
  • 206 angel-backed companies 2001-2008: 0.5% did an IPO and 2.9% were acquired
  • Each direct observation is a company observed through its entire life cycle from startup to exit
  • Which usually costs $millions (all investors) and often takes 5 to 10 years
  • One data point = $millions and a decade -the 3rd reason learning to be an angel is difficult and expensive
  • The current exit rate for all angel-backed companies seems to be around 2 – 3%
  • I believe we can get to 5 – 6% which would more than double our returns
  • My hope is that we can get to 10% eventually
  • Here are some ways we can improve our probabilities of successful exits

An Early Exit is Better than a VC Financing

Recently, at an Exit Strategies Workshop in Victoria, someone asked me to compare the pros and cons of an early exit versus a traditional Venture Capital financing.

The scenario we used for our example was a successful startup company with a proven business that needed $10 million to $20 million to fund growth.

(In this article, I am being precise about the distinction between the business and the company.)

There are only two likely options for obtaining $10 million to $20 million of growth capital for the business:

1. a traditional VC financing, or
2. an early exit.

Either way the business gets the capital it needs – so what are the differences?

Either Way You Lose Control

It would be very unusual for a company to raise $10 million to $20 million from VCs and not lose effective control of the important decisions. Most entrepreneurs don’t appreciate how much control they’ve ceded to the VCs, because many of the control provisions in the investment agreement are not readily apparent.

Yes, with an early exit, the ultimate control is now in the hands of the acquiring company. But at least that’s clearly understood by everyone at the outset.

VCs usually fire the CEO

What surprised the audience at the workshop was that the chance of the CEO continuing to run the business is much lower with a VC financing. The data on this is sparse, but in VC circles it’s widely agreed that VCs replace the founding CEO about 75% of the time.

One data point on this comes from Thomas Hellman at UBC’s Sauder School of Business. His analysis shows that VCs replace the founding CEO faster than non-VC financed companies.

Compare this with an early exit; in this case, the acquiring company will usually want the CEO to continue to run the business for as long as possible.

An Exit Generates Cash Now – Not in a Decade

The second biggest difference is when shareholders will receive cash for their shares. In the case of an early exit, all of the share and option holders will usually receive cash, notes and/or shares from the buyer at, or shortly after, closing.

In the case of a VC financing, none of the shareholders are very likely to receive any cash for their stock until the VC exits.

The problem is that, on average, it takes about another decade for a liquidity event to occur after a traditional VC fund invests. (This is explained in my book “Early Exits“.)

And On Average a Lower Return

Even worse, for more than a decade, the net returns on traditional VC funds have been negative. Statistically, this means that when the shareholders eventually receive cash for their shares, it will, on average, be less per share than when the VC actually invested – likely a decade before.

This may not seem intuitive. But there is no question that for more than a decade VCs, on average, have lost money.  If they bought shares in a company for $10, when they exit, the chances are they will realize something less than $10 per share.

Yes, some of that is due to fees, but that isn’t the main point here. Taking money from a traditional VC has meant, at least for the past decade, that the value of the company would decrease. (There has been much written about this and some of the good references are linked here).

These are probabilities and there will always be exceptions

Of course, there are counter examples. There have been many situations where VCs invested and the shareholders had exits at prices above when the VCs invested.

Please remember that this article is about probabilities.


The data we have leaves little doubt that, on average, choosing VC financing instead of an early exit will result in:

1.    a higher probability of the current CEO not running the business for long,
2.    about a decade-long delay in receiving cash for your shares, and
3.    on average receiving less than you could have with an early exit today.

Anyone want to debate this?

I appreciate that this will seem controversial to many readers. Some VCs may disagree.

I don’t think I’m biased. I’ve started and run a VC fund and was very successful as a VC fund manager. Many of my good friends still call themselves Venture Capitalists.

I’d be pleased if this post generated comments on my blog or a real-time debate. That conversation will help entrepreneurs and other shareholders make better decisions about the growth capital options for their businesses.

Exit Strategies Workshop 2011 Part 6
Financing Strategy for Maximum Exit Value

Highlights of Part 6 – Financing Strategy for Maximum Exit Value:

  • Axel Christiansen introduction. And why is he so funny?
  • What is Sub Debt and who is it useful to? In what types of exit transactions?
  • Company value as a multiple of EBITDA. The “New Normal”.
  • Seven reasons to create a financing package.
  • Vendor notes and other financing tools.
  • Case Study: Buy Me Inc.
  • Subordinated or mezzanine debt. Cash flow based financing – no asset coverage required.
  • The ‘glue’ in buy-out transactions.
  • Vendor objectives, purchaser objectives, BDC objectives. The Perfect Deal.
  • BDC Subordinate Finance – the largest national subordinate finance group in Canada.
  • BDC for Management buy-outs (MBO), leveraged buy-outs (LBO), strategic acquisitions (roll-ups).

The Exit Strategies Workshop 2011 Part 3
Every Company Needs an Exit Strategy

The third presentation at The Exit Strategies Workshop 2011 explains why every company should have a clear, signed exit strategy.

Highlights of Part 3 – Every Company Needs an Exit Strategy.

  • The exit is just another business process.
  • Companies should be sold – not bought. Why this is such a critical concept.
  • Optimum exits require strategy and planning.
  • A focus on exits is healthy – it does not detract the team from their primary mission.
  • I believe entrepreneurs and angel investors would have better returns and more fun if we designed and built more companies with a focus on the exit.
  • Why the exit strategy is the most important element in the business plan.
  • It can be as simple as: “Our exit strategy is to [sell the company] in about __ years for around $ __ million.
  • Why it’s essential to have alignment on the Exit Strategy and how to maintain it.
  • The importance of having a clear exit strategy before doing any work on financing.
  • How I almost lost my first company by not understanding this.

The Exit Strategies Workshop 2011 Part 2
We Need More Exits

In the second presentation at The Exit Strategies Workshop 2011, Mike Volker describes why Angel investors are saying: “We need more exits.”

Highlights of Part 2 – We Need More Exits:

  • The big question: Should we grow bigger or sell?
  • It’s all about EXITS!! – need a real “Plan”.
  • But, CEOs are in no hurry to sell.
  • Angel Investing 101.
  • Case study – What’s wrong with this picture?
  • Vesting – more important than most investors realize
  • Clear, clean cap table – No OPTIONS!
  • The Challenge: How to Exit? Who can help?

The Exit Strategies Workshop 2011 Part 1
The Economy Has Changed

The first presentation at The Exit Strategies Workshop 2011 describes why this is a “Golden Era for Entrepreneurs.”

Highlights of Part 1 – The Economy Has Changed:

  • The whole world has changed.
  • The big tech companies aren’t creating wealth anymore – for their investors or employees.
  • Startups create ALL of the new jobs.
  • What does this mean for the startup economy? How can we make money?
  • Four changes that make entrepreneurs money:
  • 1. Innovation happens in startups
  • 2. Internet acceleration
  • 3. Capital efficiency
  • 4. Early exits
  • The biggest opportunity for entreprenuers is “innovation.”
  • Why innovation happens in startups not big companies.
  • Our 21st Century economy – “A Golden Era for Entrepreneurs.”

The Psychology of Exits

When a saleable company fails to sell, it’s often the seller’s psychology that kills the transaction. Most of the time, the seller doesn’t even know that they were the reason their company failed to sell. This talk describes the seller psychologies that can kill exits.

The Psychology of Exits
Presented at the Alliance of Merger and Acquisition Advisors Summer Conference
July 10, 2012 in Chicago


  • What percentage of M&A transactions close after an M&A Advisor has been engaged?
  • According to a speaker from a large multi-national M&A Advisory firm, only 8% end up closing
  • Why do ‘saleable’ businesses fail to sell?
  • Is the fault most often with the Buyers? Or the Sellers? Or the M&A Advisors?
  • Two reasons the Sellers are the most likely cause of an M&A failure:
    1. The business becomes un-saleable
    2. The Seller’s psychology – including some of these common psychological pitfalls:
  • Unrealistic value expectations
  • “It Feels Like I am Selling my Child”
  • “My Business is Me”
  • “I am Still Having Fun”
  • Fear and Greed
  • “I am the Smartest Guy in the Room”
  • Approach Avoidance
  • Cloaked Decision Makers

This is the Powerpoint for The Psychology of Exits.

The Psychology of Exits – AM&AA Summer Conference 2012 from AM&AA on Vimeo.

Why Exits are So Hard to Learn – Part 1

How Exits Have Changed in 2012 –
Presented at the National Angel Capital Association Summit –
March 8, 2012 in Austin, Texas –

Highlights of Part 1:

  • Investing is easy – getting our money back is much more challenging
  • Three reasons why it’s more challenging to learn about exits than investing
  • Exits just don’t happen very often – learning requires decades of experience
  • Why the real estate market misleads us when we think about exits – how the markets differ
  • The financial markets have changed – what’s motivating M&A buyers today
  • The types of M&A buyers active in the market today and what each type is thinking
  • Big company buyers, medium sized companies and private equity fund buyers

This is the Powerpoint for “How Exits Have Changed in 2012“.

The video for part 2 of How Exits Have Changed is here.

Why Every Company Should Have An Exit Strategy

Every company needs an exit strategy. Ideally, the exit strategy should be signed off by the founders before the first dollar of external investment goes into the company. A good exit strategy, well matched to the characteristics of the business and market, will:

  • improve the probabilities of success
  • shorten the time to exit, and
  • often significantly increase the ultimate exit valuation

This is especially true today when early exits are such an attractive option for many startups. These days, companies are often sold only two or three years after they’re founded.  Flickr was a year and half old when it sold for $30 million. Club Penguin sold for $350 million when it was just two years old. YouTube sold for $1.6 billion when it was two years old.

Of course, in many cases it will take longer than two or three years to achieve an optimum exit. But this doesn’t reduce the requirement for an exit strategy and continuous work on the exit plan – right up until the day the company is sold.

It’s Just Another Business Process – Often the Most Lucrative

Selling a company is just another business process. It’s a process just like a product development, financing plan or marketing campaign. The biggest difference is that the exit process often makes more money for the shareholders than any other process during the company’s lifetime. This is not just because the exit monetizes all the work and investment that went into the company.

Designing and executing the exit well can easily increase the entire value of the business by fifty percent, or more. Yes, designing and executing the exit well, can make half again as much money as all the hard work, and investment, that goes into every other business activity. That is why the exit is often the most lucrative of all business processes.

Every manager knows that large business goals need a strategy, plan and regular monitoring. The exit is no exception.

The Entire Purpose of the Company

Looking at it in the simplest terms, or as an investor would, the company is simply a black box with the inputs being entrepreneurs’ effort and investors’ cash and the only output being the purchase price paid by the ultimate buyer.

Simple Model of a Company

Everything else that happens inside the black box is simply a component contributing to the single output – the successful exit. While this is no doubt an enormous simplification, it is clearly the most purpose of most companies with external investors.

Exit Strategy is a Prerequisite to a Financing Strategy

A clear, signed exit strategy is especially important before developing a financing strategy. Most entrepreneurs, and a surprising number of investors, don’t fully appreciate the degree to which different types of investors are only compatible with certain exit strategies.

Inadvertently creating a misalignment between the types of investors and the exit strategy often results in a complete failure of the company. This is particularly heartbreaking because it usually happens years after the company has already become a significant success. This is a core message in my book Early Exits.

Build It and They Will Come – Not

The classic joke for managers involved in product development is ‘build it and they will come’. In the 80s, there were several well-known management gurus who wrote books and made good livings on the lecture circuit advising entrepreneurs and managers to listen to their customers before starting to build new products or services. Today, almost everyone agrees that a strategy of ‘building it and they will come’ is laughably ill-advised.

Even so, many entrepreneurs still go happily along building companies hoping that one-day a ‘buyer will come’. It’s an equally bad idea. To succeed in any business process you have to start at the end – clearly articulate the desired outcome and then plan the intermediate steps needed to achieve the goal.

For most technology companies with external investors, the ultimate objective is to sell the company. To achieve that goal, the exit strategy should become part of the corporate DNA. The exit strategy should be clearly articulated, signed off and reviewed regularly. With a good exit strategy, and reasonable attention to the process, your company will exit earlier, for a better price and with better terms.

Exit Strategies Don’t Need to be Complicated

An effective exit strategy can be pretty simple. Here’s a real life example from a company that I can talk about – Parasun Technologies. At the company’s second strategic planning retreat in September 2005, the board and management agreed that “Our Core Purpose” was to sell the company for more than $10 million by late 2006 or early 2007.

That’s all you really need: a target date and a price. Exit strategies can be more complicated, and might include statements on maximizing strategic value, target customers and even sales tactics. But the two essential elements are when and how much.

Parasun’s simple exit strategy worked very well. In February of 2007 the company agreed to be sold for $14.8 million. The transaction closed in May. The story of how the price grew from $10 to $14.8 million is one of the case studies on this blog.

To learn more have a look at this video on exit strategies  from the Exit Strategies workshop.

The Corporate DNA

Companies certainly have cultures.

They also seem to have DNA. Corporate DNA is formed early on in a corporation’s life-cycle. But unlike most living creatures, a company’s DNA can change later in life.

Corporate DNA, like all other DNA, determines, to a large extent, the characteristics and success of the organism.

Flaws in the DNA can lead to infant mortality, or failure modes, that might not be apparent for many years.

When investors, or other new partners, join a company, their DNA is effectively combined with the original entrepreneurial DNA – resulting in a new hybrid organization.

It’s absolutely essential to the health of the organization to think hard about whether this new DNA is complimentary to, or even compatible with, the original organizational DNA.

Adding Financial DNA

This slide is from the PowerPoint presentation: “Early Friends and Family Financings” available at

Exits With VC and Angel Investors – The Wiltbank Data

The most important new data on angel investing comes from Robert Wiltbank of Willamette University and Warren Boeker of the University of   Washington.

Robert Wiltbank is one of the world’s pre-eminent researchers on angel and VC investment.

One of the fascinating aspects of this research is  how VC investors affect the exits of angel-backed companies.

When I first saw this data, it leapt off the page at me.

Exits with VCs and Angels

This graph shows what the greybeard VCs and angels have known for a while. If your company has VC investors, they will reduce the probabilities of an exit that would produce a 1-5x return for the angels. That exit might have produced a 100x return for the entrepreneurs (because they paid much less than the angels for their shares).

Having VC investors does increase the probabilities of exits above a 5x return.

But there is no free lunch. This data shows that after a VC invests your chances of failing completely  also increase significantly.

The other important factor, which unfortunately this data doesn’t show, is that adding VC investors will also increase the time until a successful exit by about a decade.

This is an important message in my new book: “Early Exits – Exit Strategies for Entrepreneurs and Angel Investors – But Maybe Not VCs“.

Exit Valuations Are Usually Under 30 Million

The really interesting story about tech exits these days is not the small number of really big company acquisitions, it’s the big number of smaller acquisitions. For the typical entrepreneur and angel investor, these smaller transactions are an excellent way to make several million dollar capital gains.

I’ve written before on why this is a great time to plan an early exit. The tech M&A market is hot. Big companies know they are better at company acquisition than developing new ideas in house. And big companies have lots of cash.

The financial media, and most bloggers, write about the really big startup exits like Club Penguin, YouTube, Skype and MySpace.  Those are certainly exciting company acquisitions and great startup stories.

But for the other 99.99% of entrepreneurs and investors, the really exciting news is the large number of tech company acquisitions for under $30 million. Our perception is skewed by the media because few of these smaller acquisitions get feature stories and most don’t even get a detailed press release.

Strong Trend But Little Hard Data

It is easy to observe the strong trend toward earlier exits at valuations under $30 million. Big companies and M&A advisors are talking about it and writing about it. Google even makes it part of their messaging to startups. But when I tried to find a good source of quantitative data, I wasn’t successful. Even when I’ve paid for M&A acquisition databases it was easy to see that most of the under $30 million transactions weren’t included.

The data isn’t available for smaller exits isn’t available because it wasn’t ever released. In the majority of transactions, neither the  buyers or the sellers really want the information about valuation or terms in the public domain.  Every acquisition agreement has non-disclosure wording.

For the larger transactions, it’s much more likely that either the buyer or seller is public. If one of the companies is public, and the transaction is material, according to generally accepted accounting principles, then the information has to be disclosed in the financial statements. In these cases, a writer or blogger, will almost always write about it and Google will index it. So we usually have great detail about large transactions, but often absolutely none about the majority of the smaller ones.

The best reference I did find was an article by Om Malik titled “The New Road to Riches” which was in Business 2.0 a few of years ago.  He reports that the Mergerstat database, which includes about 5,000 tech company acquisitions per year, showed an average selling price of $12 million.

Examples of Early Exits Selling for Under $30 Million

I spent some time on Google searching for recent tech company acquisitions and quickly pasted this list together. Most of these are pretty big successes that millions of us use every day.  They are also great companies acquired for $30 million or less.

  • Google bought Adscape for $23 million (now Adsense)
  • Google bought Blogger for $20 million (rumored)
  • Google bought Picasa for $5 million
  • Yahoo bought Oddpost for $20 million (rumored)
  • Ask Jeeves bought LiveJournal for $25 million
  • Yahoo bought Flickr for $30 million (rumored)
  • AOL bought Weblogs Inc for $25 million (rumored)
  • Yahoo bought for $30 – 35 million (rumored)
  • Google bought Writely for $10 million
  • Google bought MeasureMap for less than $5 million
  • Yahoo bought WebJay for around $1 million (rumored)
  • Yahoo bought Jumpcut for $15 million (rumored)

Why is This Happening Now?

One of my friends in a Fortune 500 company explained it to me this way (paraphrased): We know we aren’t good at new ideas or startups. We basically suck at building business from zero to $20 million in value. But we think of ourselves as really good at growing values from $20 million to $200 million or more. It’s a different skill set than starting things.

If we see a company acquisition priced at $100 million, then our view is that it’s already out of our sweet spot for adding value.

But at $20 million, it’s really easy for me to get it approved. If I could find enough good ones, I’d do a $10, 20 or 30 million acquisition every month.

The Opportunity for Entrepreneurs and Angel Investors

It’s pretty clear that the optimum strategy for over 99% of startups today is to design the company, and its corporate DNA, so all the stakeholders are aligned around the idea of a company acquisition in the under $30 million range.

The good news is that these exits can often be completed in just a few years from startup. They also have a much higher probability of success than swinging for the fences and hoping for a big NASDAQ IPO.

This exit strategy is nicely summarized in “The New Homerun” by Tom Stein in Mergers & Acquisitions magazine, May 2008. He said: “Startups must be content with hitting singles or doubles, that is, a buyout of $50 million.”