In my early-stage venture capital fund, The BC Tech Fund, I invested in nine companies. About three years after the first investment, three of the nine had achieved early exits – one went public and two were acquired.
• Brightside was acquired in February 2007
• Parasun was acquired in May 2007
• Metrobridge went public in July 2007
These are much faster exits than in typical venture capital portfolios. At a recent investor conference, someone asked if I thought it was a fluke. My answer was: ”No, that was our plan.”
The BC Tech Fund, and the other BC Advantage Funds, are ‘VCC’ funds. These funds provide the investors with a 30% tax credit, but prevent the investors from redeeming their shares until five years after the money is invested.
Five years is a relatively short timeframe for a venture capital fund. Most of the traditional funds are designed for 7 to 10 year lifetimes. When we started BC Advantage, the legislation was brand new and nobody had any idea what the redemptions would be like at the end of the five years. As a fund manager, I wanted to be sure I would have enough cash to redeem the investors.
My portfolio strategy was based on maximizing returns, early exits and diversification. These early exits helped make the BC Tech Fund the best performing technology retail venture fund of its vintage in Canada.
There were two primary ways I worked toward early exits: selection and structuring. The first thing I did when looking at any investment was to ask how I could do an early exit. If I couldn’t see an obvious, direct route to an early exit, or if the entrepreneurs and the board were not enthusiastic about an early exit, I passed.
In the early days of BC Advantage Funds, some of our directors were concerned that our enthusiasm for early exits might be somehow inappropriate or a negative for entrepreneurs. After deploying the strategy for five years, it is clear to me that it’s a huge positive.
I have never met an investor who was not enthusiastic about early exits. I have met a few entrepreneurs who dream of building a big company and working in it until they retire. One even admitted he hoped his son might succeed him in the company. That is a perfectly fine goal for them, but it just doesn’t work for me, or any other investors I know.
Over the years, I’ve found that about 90% of entrepreneurs are even more excited about an early exit than the investors. The reason is simple. The investors have other capital. Selling one investment won’t change their lifestyle. But for the entrepreneurs, selling their stake in a company is almost always an enormously positive life-changing event. And their preference is to achieve that as soon as possible.
The results from my early venture capital fund shows how early exits can maximize returns. The BC Tech Fund is also a good example of how we are good at early exits in BC. Early exits also boosted the returns in my new angel fund and provided our early investors a 100% return of their capital in just over two years. Some other notable examples of early exits in BC are on this page.