complicated concepts

How Investors Get An Exit

Plenty of people become investors for admirable reasons... like supporting an underrepresented founder, or a project that will make the world a better place.

But making an investment is not the same as making a donation.

When you invest in a company, you are hoping for a return on your investment, regardless of the reasons you decided to invest.

So, how do we get to an exit? Is there anything we can do to move it along quicker? Or increase our payout?

The Short Answer

No. There's not much we can do.

The Medium Answer

Ironically, investors write checks hoping for an exit... but exits tend to happen when things are not going that well for a business.

Remember: companies are run by people. And people have to be motivated to run a business.

A founder who isn't motivated – whether that's due to founder drama, burnout, or lack of market pull – won't want to continue building her business.

So she might begin actively seeking acquisition or acquihire offers.

But when things are going well, founders don't tend to want to sell. They tend to want to keep building and see how far they can take their company.

And if you're a small / early investor, you probably don't have the power or influence to urge the founder to exit if she's not ready.

In which case you might find yourself holding on to shares that are quite valuable, but without a path to liquidity.

The Long Answer

That's not to say that successful companies don't exit. There are plenty of examples of successful companies whose investors saw a great return on their investment.

But there are just as many companies (if not more) that fall into one of these buckets:

Company does well but never exits
Company doesn't do well and has a tiny exit
Founders get acqui-hired and company shuts down

In the first bucket, you've got your "lifestyle" companies.

These are businesses that earn significant revenue but aren't a household name. A company that is not well known is unlikely to receive inbound acquisition offers.

Meaning those founders would have to make a huge effort to get acquisition offers... and even if those offers came, they might not be that lucrative.

So the founders opt to continue the business indefinitely. And despite the business' high revenue and profitability, investors never see a return.

In the second bucket, you've got your "low return" companies.

These are businesses where the founders didn't want to keep running the business, so they took an acquisition offer.

But because the business was't doing well, the acquisition offer wasn't that high. And as a small investor, you may make only a 1x or 2x return on your investment.

In the last bucket, you've got your "I got screwed" companies.

This is more common than people realize.

In this situation, the founders come to an arrangement with the acquiring company. The founders are offered a sweet job at the acquiring company with a fantastic bonus structure... like, in the millions.

Then the startup is quietly absorbed by the acquiring company, or shuts down altogether.

Leaving the investors with nothing.

What can we do about this?

While most of this is beyond your control, there are some roads available to you.

Make sure you're aligned with the founder.

Before you make your investment, ask the founder: "What does success look like for you?". You're looking for insights into how they're thinking about an exit.

While there's no predicting the future, if a founder responds with "I want to build a business that I can leave to my children," then you know you probably won't see a return in 5-7 years.

But if they say, "I exited my previous two companies in 9 years and plan to do the same with this one," then at least you know there's a chance.

Build a large portfolio

You know the saying "9 out of 10 companies fail"? Technically that's not true. It's just that 9 out of 10 companies don't return anything to their investors.

The best way to hedge your bets is to build a large and diverse portfolio.

The more founders you invest in, the more likely one of them will help you get a big exit.

Explore secondary markets

If you have shares in a company, but are looking for a quick exit, a secondary market could be a good option.

Platforms like Forge and Equity Zen and even Hustle Fund Scale may be able to help you liquidate your equity.

Keep in mind that this avenue works best when the portfolio company is a well-known brand. Most people don't want to purchase secondhand shares of a company they've never heard of.

Be available to help with an acquisition

If your portfolio company is seeking an acquisition, and you work for or are connected to a big company, you may be able to help.

Tell the big company about your portfolio company. Mention that they are about to be acquired. Ask if your company would be intersted in chatting with the founders.

Worst case scenario, they say no. Best case scenario, the company IS interested, and their interest kickstarts a bidding war.

In a bidding war, offers increase, and the outcome for the founder and the investors ends up being pretty good.