Lessons from VC Exits (Part I)

The Reality of Realizations

The bulk of time and energy as a rising VC professional goes into getting those initial deals done. However, of course the true measure of success in the industry isn't just about making new investments; it's about achieving profitable exits on those existing investments.

Influence along the Long Road

For newer venture capitalists, exits can seem like a distant, almost mythical destination, a fairy-tale land. Depending on measure and time-period, the median time to exit hovers around seven years from initial seed investment, meaning half taking even longer than that! Reflecting on my own journey, it took nine years from my start as a VC associate to the point where I could claim full responsibility for writing an investment check resulting in exit of over $100M. It was sixteen before I could say the same for a $1B+ exit, and shortly thereafter exits at valuations north of that mark followed. This timeline underscores a fundamental lesson: patience is not just a virtue but a necessity in a venture capital career.

Like other aspects of portfolio work, you really can’t direct what happens with exiting, but just like other situations you can influence the outcome.

A few years ago, I worked closely with a Founder from the seed stage through to a substantial Series B round led by one of the premier aircraft carrier VC firms. Acquisition offers had been presented to the company previously, but this latest was an order of magnitude more lucrative. Perhaps unsurprisingly, it was met with heavy resistance from this largest firm in the syndicate, as it just didn’t move the needle on their multi-billion dollar fund. I had a significant discussion with the Founder, urging him to step back and carefully consider both the professional and personal stakes involved. We explored various paths forward, using a specific framework (mentioned below) to assess the options. In the end, he decided to sell the company for a substantial sum, which allowed him to secure a nine-figure personal payout and enjoy a well-deserved retirement on a beach, while the exit also returned more than half of our fund.

The Best Startups Attract Multiple Opportunities

The next rule to remember about exits is all great (and even some not-so-great) startups get sniffed for acquisition by a larger corporation along the way up. That’s one surefire way to know you have a (potential) winner on your hands. Even Facebook famously (successfully) turned down the $1B acquisition offer by Yahoo. The first (and many thereafter) early acquisition opportunities won’t be your last. It’s helpful to remind yourself of that fact, but it’s even more helpful to really reinforce this also to the Founders who you work with. An early offer with life-changing money for an entrepreneur can be quite tempting and difficult to turn down.

How, then, do you know when to encourage a Founder CEO to take an early acquisition offer prior to the IPO and when to press forward? The key framework which I was taught by a mentor is to ask: is the potential outcome entirely asymmetric to the current underlying business? In other words, does the price inordinately reflect more than amount of business metrics value which has already been created by the company. However, if the business is compounding without significant risks in sight, better to be patient. The first couple acquisition offers won’t be your last.

Navigating through the Haze

It's crucial to recognize that different stakeholders may have varying motivations regarding exits. Early in your career, any exit may seem like a win, and that’s largely true, but as you gain experience, understanding the broader implications of various constituents becomes important. Co-investors might be chasing a larger win (like in the case above), while your general partners may have different financial or strategic objectives influenced by the fund's lifecycle. For instance, they may be patient to larger outcome to line their own pockets or see an early exit as a meaningful hope to drive real returns for a specific fund.

You’re not going to get it perfectly right. Not all exits are created equal. Some are straightforward, such as an outright acquisition, while others involve nuances like selling stakes in secondary markets or managing selling shares post-IPO. The perfect timing for an exit rarely exists, and hindsight will always be 20/20. Navigating these decisions requires a mix of analytical rigor and instinct, but striving for perfection can be the enemy of really good.

Exit success is not a solo achievement; it will have many contributors. Beyond the Founders and the company’s employees, of course: co-investors, team members, and others involved all play pivotal roles in facilitating a successful initial investment and eventual exit. However, navigating the internal and external dynamics of credit allocation is crucial. It's important to acknowledge where credit is due, but also equally vital to assert your own contributions. If you don't highlight your achievements, the void will be filled by others, so embrace and recognize your role in these successes, even if self-promotion does not come naturally.

The Final Rule: Cash is King

The old cliché remains true in venture capital: "Don't count it until the cash is in the bank." The journey from investment to exit is fraught with uncertainties, and the only true measure of success is the realized return. We’ve discussed how interim valuation marks can be ephemeral, but the certainty of the stock price of an acquirer or an IPO during its lockup period can also falter, and even more so with lightly-traded tokens on the blockchain.

The path to successful exits in venture capital is paved with patience, strategic influence, and a deep understanding of the various motivations at play. Each experience will help inform the next, but tasting the final outcome is quite sweet.