Traditionally, investors and entrepreneurs believe there is a direct correlation between the amount of capital raised and exit price. Seems reasonable, right? Not so fast.
Basil Peters was the first to challenge this idea with his 2009 book called Early Exits. The author defines “Early Exits” as the sale of a company (typically under $30M) within three years of first capital injection.
In his book, Peters proved there is a sweet spot in the capital raising process in which startups that have raised $2M to $3M actually have significantly more lucrative exits than those that have raised $3M to $5M. Still not convinced?
Exitround, a marketplace for buying and selling technology companies, recently released an analysis of “boutique” (under $100m) M&A trends. The report validates the “Early Exit” concept by highlighting the fact that raising more capital does not necessarily mean a higher exit price and that exits are happening quickly.
The following graph produced by Exitround demonstrates startups often miss their ideal exit price by waiting to sell, a phenomenon Peters coined as, “Riding it over the top.”
Peters also hypothesized that a majority of companies being acquired are choosing not to raise venture capital funding. Again, Exitround data confirms that the majority (86.7%) of companies acquired raised less than $5M.
So How Long Does it Take?
According to Peters, meaningful exits come within just a few years of first capital injection. Exitround confirms his hypothesis by showing exit prices approaching $30M within 5 years. Typically, companies don’t raise capital for one to two years, which conforms to Peters’ timeline.
Innosphere Early Exit Program
Innosphere has developed a program that helps startups and their investors plan for and achieve successful early exits through active management and a higher engagement of Innosphere resources.
If you are interested in learning more about Innosphere’s Early Exit program contact Mike Freeman, Innosphere CEO, [email protected].
Be sure to look for another blog next week on how you can plan for your Early Exit.