I was recently talking with a Belgian investor friend of mine about timing of exits. A company where we had both been investors had ultimately failed but there had been two offers for the company in an earlier stage, a year or so before the bankruptcy. In late 2000, early 2001 the world (in Europe) did look rosy and the other investors did not want to sell, convinced that the company needed to grow further to maximize sale proceeds. In hindsight, we all wished that a sale had happened well before the cash ran out.
Is there a best approach to the exit timing? Should one take the first offer that comes along? My guess is that it much depends on the stability of the company going forward. In the heyday of the early 2000's we assumed that further financing could easily occur. We were very very wrong. Even if a company has larger VC investors, it doesn't mean that a follow-on round will happen. VC's rightfully can and do change their opinion on the whether investing more money into one company is a better place for their LP's money than investing in another company. This issue is one which entrepreneurs typically miss. They often can't imagine one of their investors not continuing to invest. My survey (see survey report in my web site) showed how strong this tendency is, with more than half of the management respondents indicating that they expect investors to continue to participate in follow-on rounds.
Exit timing and valuation level is a hotly disputed area among board members. An investor board member may be under pressure to get a quick sale for reasons unrelated to the company such as starting to raise a new VC fund. Often these pressures are unknown to the entrepreneur and can take them by surprise. The pressures differ by investor and change over time.
Ideally, a board of a VC-backed company should discuss and update regularly a set of exit "scenarios" which would include an assessment of what it will take to get there including milestones and follow-on financings, as well as likely trade sale buyers, and trends in IPO and M&A markets. It is time to take these kind of discussions into the board meetings themselves with the entrepreneurs or founder shareholders present, rather than in bilateral telephone calls between the VC's.
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