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Exit Timing, M&A Misperception

Exit Timeline with Venture Capital Investors

by Basil Peters on July 1, 2010 · 3 comments

My previous post showed how  the math behind venture capital funds determined venture capital exit times.  The post included a simple model to show what the median exit times really meant to entrepreneurs and angel investors.

That model illustrated how the decision to accept equity from venture capital investors statistically extends the time to  exit for the angels by a decade or more.

The graph below illustrates that  happens to the time to exit, and probability of exiting, without and with venture capital investors. This graphic shows this from an angel investor’s perspective. The times are even longer for the entrepreneurs and friends and family investors.

The model, and the graphic below, illustrate a typical startup where if the board decided to exit before accepting VC investment, it might have been sold around year six – four years after the angels invested. But when venture capital investors are added to the corporate DNA, the time to exit extends to somewhere around year sixteen, twelve years after the angels invested.

Exits with Venture Capital Investors

There isn’t any actual  data on this yet, but the  implications are clear. If a company accepts financing from  venture capital investors,  the minimum exit valuation per share has to be 10-30 time more than the price the VCs paid. The venture capital investors will almost certainly block any attempt to sell a successful company that does not meet their minimum required returns.

Holding out for a very high value exit  will dramatically reduce the chances of success and  statistically extend the exit time for the angels and entrepreneurs by over a decade.

This is a main element in my new book: “Early Exits – Exit Strategies for Entrepreneurs and Angel Investors – But Maybe Not VCs“.

{ 3 comments… read them below or add one }

Basil Peters August 30, 2011 at 4:03 pm

Reactions

kevindewalt 1 year ago (as of 2011-08-30)
from twitter

interactive chart of company growth (via @ptrcksmth) Excellent! http://bit.ly/3uWMO8 has exit time by funding

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David Maurer August 23, 2012 at 5:00 pm

Basil,

For the VCs that invest in a series D round, what does your research show as to probability of the VCs successfully exiting within 5 years or less, and conversely, is there any research showing the probability of the invested companies remaining as a going concern 5 years after the D round closes?

Thank you,
Dave Maurer

Reply

Basil Peters September 20, 2012 at 5:55 am

Dave – this is an excellent question and there probably is data on this in the VC related databases. They are expensive, but you might be able to get a trial. But each situation is so unique that I am not sure how useful the aggregate statistics will be to your specific situation. There are so many independent variables. For example, the composition of the board is probably the most important factor in determining the answer I think you are looking for. Sorry I could not be more helpful on this one.

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