Exits

People tend to be obsessive about exits. I get plenty of startups who want to know about my exits before presenting to Angel to Exit. they think that it's all a bunch of BS unless you have exited with big multiples. I understand that, but I don't like to discuss exits and tend to avoid it. I was taught not to "show off" or "brag", and of course lots of folks who had big exits claim to know a lot but seem not to when it comes to the next investment.

But I figured I would discuss my exits since I started as an independent business person in the early 1970s. I will start by saying I don't have exact figures.

Multiples

One way to judge exits is by the multiple from investment to exit and the time it took. A 10x exit in 20 years is not very good, but a 5x exit in 1 year is really spectacular. After all, 10x in 20 years means that $1 today is worth $10 in 2038. That's about 12% interest compounded annually. But 5x in 1 year is 500% interest.

But we'll go with that number as the key. How many times the original equity was taken out of the business in how many years. However, there is also the issue of salaries and other compensation. If the CEO isn't paid, the equivalent pay is like an investment. So if we calculate that, the actual amounts are important, not just the multiple. For example, if the 5x in 1 year started at $10K investment and pulled out $50K at the end of the year, the CEO (assuming no other expenses and no pay) only earned $40K for a year of effort.

But we will still go with exit/investment and include sweat equity at whatever is reasonable for a CEO (and other participants of course also have to be taken into account).

The 1970s and early to mid 1980s

In the 1970s I mostly worked as a consultant, but the legal situation was very different then. There was no corporate entity in my case, so we won't details exits until the late 1970s where I graduated and went back to school while paying my way. I had some loans, but also worked independently, and so forth. We will call all of that a wash as well. I made enough to pay my way.

The late 1980s

The Radon Project started with something like $10K, none of which was my money. I was paid a salary and given a percentage for running the company. We will call the initial equity $10K for the sake of argument, given that the total cash investment was that much by others. After exit, calculating backwards, I made about $500K in excess of salary. So we will call that a 50x in 2 years.

At the same time, I was working as a consultant doing short courses. That wasn't a business, per se, but it became part of Legal Software Incorporated, which started in the 1985 time frame. LSI eventually sold ASP (a product) and that earned perhaps $100K in 2 years. We will call that break even as salary given that I also had a salary from The Radon Project at the time. The 1990s

In the late 1980s, I founded Management Analytics, which I have owned in different forms and states since that time. I still haven't exited, nor do I plan to. So that will end up being well over 30 years with no "exit". However, along the way, it started a number of other companies (about one a year spin-offs), each of which made a small profit (say $100K for me) and a similar amount for a partner. So the net is completely dependent on how much salary you attribute to what.

In the late 1990s I was on the advisory board for a company that did an exit of about 50x in 3 years. I think I contributed substantially, and I ended up getting a pretty decent check at the end (capital gains on the equity I earned). Not enough to pay for a house, but not bad either.

The 2000s

In the 2000s I had 3 companies as I recall. One exited for ~$50M and I ended up getting about a 10x exit after good sized salary and bonuses in 3 years, followed by an even better consulting contract with the entity. One exited after about 2 years having provided an extra $100K/y (I was not an employee and didn't work for the company) on something like $10K initial funding. So that's 10x each year for 2 years before it was put out of its misery. The 3rd company was essentially a consulting firm and I was well paid for my time, but the exit was closure. Technically, I put in perhaps $1000 and lost it, but of course I also made a lot of money in losing it. So that's a 0x exit.

In the late 2000s I formed another entity that ran for about 5 years. I made profits, but eventually closed it and purchased the assets.

The 2010s

I should note that as a result of efforts in the late 1990s and 2000s, I ended up with ownership of some substantial intellectual property. Indeed I still have some IP from the 1980s as well. This is not yet monetized fully, and I suspect that it will be worth $1-$20M depending on how things go in the next few years. That would be something like a 10x-200x exit in 10-20 years on different parts of the IP portfolio.

So far, in the 2010s, I have invested in something like 50 companies. I am still involved in about 20 of them, and the remaining ones have exited through portfolio and other sale at about 15%/y average. Of these, something like 5 have exited the bad way (no returns) and the rest were still operating when I exited.

The 20 or so investments I currently hold are listed in the quarterly updates to Angel to Exit.

What does all this come to?

I understand that companies are looking for folks who have exited at 500x in 2 years from a concept because they think that going with a winner is the way to win. I don't particularly agree with this approach, because I believe that the path to success is through building a solid business that works. It's not the home runs that win most games, even though they can be pretty spectacular. It's the singles and doubles put together one after another that score the most runs and win the most games. I should note that I am currently advising a sports (baseball) company, so my current analogies may be skewed a bit.

My goal, and the goal of Angel to Exit, is not the exit. It's the business. We want to help startups develop into excellent businesses, some of which will exit big, some of which will fail, but most of which will stand the test of time and grow to benefit the investors, employees, and the world we all live in. That's the type of company we are looking for, and that's what we are trying to accomplish.

In summary

I have lots of experience with entries and exits, including plenty of "failures", lots of "profits", lots of other paths to monetization, and a few larger (10x or better) "exits". And the multiples are essentially meaningless, because I take a portfolio approach to investing and operating companies, and I think the best companies do the same thing. Because all the dreams and anticipation help keep folks motivated, but it's the good judgment and sound risk management that help most businesses succeed in my experience, and the lack thereof that causes them to fail.

Copyright(c) Fred Cohen, 2018 - All Rights Reserved