Patents are a double-edged sword. They are a valuable tool for enhancing both the pre-money valuation and the exit value of the company. However, their overall value may decrease if you wait too long. If a big company starts infringing, it simply costs too much money and takes too long to try to defend your patents. Then their value can really tank and reduce the ultimate exit value – yet another reason some Angels prefer early exits. 6.2 Large Acquisition or Successful IPO These are the home run exits in excess of $250 million. Although there are notable exceptions, in most cases, companies large enough to achieve these exits have required at least 10 years and multiple VC rounds of financing. VCs often push companies to “swing for the fences” and try to either hit a home run or strike out. As shown by Wiltbank, when VCs co-invest with Angels, they obtain more failures and large exits, but far fewer exits with multiples of 1–5X.
Venture Capital Involvement
70 60 50 40 30 20 10 0
35% of deals took on VC investment at some point
1X to 5X
10X to 30X
> 30X
< 1X
5X to 10X
Exit Multiples
VC Yes
VC No
It makes sense that if VCs are going to invest over $5 million, they will want to grow companies beyond the early-exit stage. They are normally seeking companies with revenue and a proven business model that they can scale before seeking a home run exit or IPO. In these cases, it is important that the Angel understands the effect of dilution by future investors on the multiple, and the effect of time on the IRR.
Time for some more math.
We know how much Angels normally invest for what percentage of the company. We know about needing at least a 3X valuation multiple between rounds. We know the exit valuation statistics. Finally, you may recall that 10% of your investments generate 90% of the profit. These are the one in ten investees that generate those 10–30X or over-30X exits you count on to achieve average portfolio IRR returns of 27% per year (go way back to the second figure in this book).
How to Achieve Good Returns
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