The exit plan
For my first few years in venture capital, I generally reacted negatively to founders who included their exit plans in pitching their businesses to us. Usually, it happens towards the end of a pitch, after discussing the growth plan to X million in revenue, which will equate to some healthy multiple of that in exit value based on where the relevant public comps are trading today. The thinking goes that if a founder is focused on the exit in the early days of building their business, it’s a bad sign for a bunch of reasons, but most of all because it’s hard to predict the future and building a big business should consume every bit of a founder’s energy and then some. While I generally still support this train of thought, I’ve grown a bit more open-minded to discussing exit plans given the limited number of paths for us as venture investors to distribute returns on our investments in early stage private companies.
Fred Wilson brought this up in his interview with Dan Primack two weeks ago at the Upfront Summit. In that interview, he explained “the thing about exiting companies in the venture business is you’re not really in control of the timing of those exits for a whole host of reasons.” For the past few years, as venture capital has flowed perhaps a little too easily, it seems that some founders have taken investment from venture firms without feeling a strong sense of duty or responsibility to repay that investment. Ultimately, I think it speaks to the character of a founder, but there have been a few recent cases - some public - where founders have been sooner willing to shut down their businesses then fully exploring a sale or other means of recovering the investment they’ve taken. On the other extreme, one of the examples Fred referenced in his interview was Uber, who have eclipsed a number of financial thresholds traditionally associated with qualifying a business for issuing public stock, but choose to remain private. By not issuing public stock, they make it very difficult for their many investors to recover their investments. Later in that same interview, Fred expanded, "When you take money from me, you have a responsibility to get me my money back at some point."
One of the key things that makes venture capital so challenging is the limited number of ways we recoup our investment. Hedge fund managers trade mostly in liquid securities. Private equity funds use leverage and often sell businesses to each other. In venture capital, the only ways we make money are when a business is acquired or issues liquid stock on a public exchange. And half the time our businesses are acquired, we end up with private stock in a different company that’s also not yet liquid. So going forward, I’m more open to discussing exit ideas on a high level to ascertain how a founder is thinking about the long term growth plan, and also to assess their character and sense of duty in paying back their investors.