6.1 Early Exit Acquisition An exit is considered early if it takes place in fewer than four years, and normally prior to any VC funding. There may be one or two Angel investment rounds involved, and the exit value is generally less than around $20 million. A large acquirer like Google or Facebook will do over 200 of these small, non-publicly reported acquisitions per year – averaging over four a week. They are very good at doing it relatively quickly, without a lot of due diligence or fuss, once a decision is made. So, if a company is well-structured for an exit, the acquirers have fairly standard terms for these smaller deals and don’t waste a lot of time on negotiations. Over 45% of all exits are for less than $10 million. That means a quick exit might be a great option for the 30% of Angel deals with a pre-money valuation of under $2 million. It might also be a good deal for the 20% of deals in the $2–4 million range. Even though a 1.5–2.5X multiple might not seem extraordinary, this can be double or triple the average portfolio internal rate of return (IRR) if the exit happens quickly. For example, a 2.5X multiple in as long as five years would still give an IRR or compound annual growth rate (CAGR) of 20% – not bad, compared to the average portfolio IRR of 27%. An early exit in less than two years starts to look extremely good. (See the table way back in the first chapter.) Some Angels prefer these “singles and doubles” rather than trying for “home runs.” Others prefer to build strong Canadian companies and are reluctant to “flip” a company quickly and lose the founders to some large company outside Canada. That is one reason why knowing yourself and co-investing with other Angels with similar attitudes is so important. “Much of what we thought we knew about exits has changed in the past five to ten years. The structure of our economy has changed. There have never been so many buyers with so much money targeted to small acquisitions. I believe history will describe this time as a Golden Era for entrepreneurs and Angel investors. Never before has it been so easy to create such valuable companies, using so little capital, and sell them so early, for so much money.” (Basil Peters, NACO Academy Module 108) In the NACO module, Peters points out many good reasons for seeking an early exit and gives several examples of how to plan, seek multiple bidders, and implement good exits, to get target returns of up to 5X. He suggests that companies hire a specialist in M&A who will be paid up to $50,000 for a work fee plus a success fee of 6–12%. He points out that, if a company misses the ideal time to exit, there is a significant probability (he estimates 50%) that there will never be an exit at all, for several reasons: • Over-investment by VCs • Competition • Intellectual property infringement
• Negative momentum • Waves of consolidation
85 A Practical Guide to Angel Investing: How to Achieve Good Returns
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