Somewhere in VC Investor Due Diligence 101, an investor is supposed to ask startup founders who would be good acquirers of their business if everything goes well. You see, most VCs invest their limited partners’ capital out of a pooled fund, and these limited partners expect said VCs to return their capital to them with a 3x cash-on-cash return. These VCs raise funds that are 10 years stated in length with a 3–4 year investing period for their platform companies on the front end and investing in winning follow-ons for the remainder of the fund.
So you would think this “exit” topic is an important question to which every founding team should have a well thought-out answer. Well, at Promus Ventures, we never ask the question (ahhhhh!).
Great founders build their company for the long run. They spend little to no time worrying about how they are going to exit their business in the future and all their time heads down trying to build their business today. The best teams have huge vision, and build for themselves a product that solves a major pain point in the world that has bothered them for years.
The truth is that in our global world of 2.6 billion current smartphone subscriptions (moving to 6B+ in 2020), if you create something that is of tremendous use for the enterprise or the consumer (or both), you will find these customers paying you handsomely over and over again.
This logic of building something to fit into another company’s roadmap is nonsensical. None of us know what other larger companies’ road maps look like into the future (much less management teams at these companies). Heck, founders don’t even know what their business will look like 12 months ahead!
The beauty of creating something from nothing is the resulting mystery of how the company grows in the days ahead. Everyone’s model looks and smells differently than the original deck, and this makes building a company so frustrating and exhilarating at the same time.
If you build your company with a timeframe in mind that has to match up to your venture capital investors’ fund dynamics, then you are hosed. Ignore their exit questions and build away. Investors will always be able to get their capital out of successful companies, don’t worry about them. In theory, all startups are disrupting someone somewhere so there will always be a strategic or financial buyer out there that will come calling for the great companies.
But to get that call, you have to build a great company first.
Recipients of this post are not to construe it as investment, legal, or tax advice, and it is not intended to provide the basis for any evaluation of an investment in any fund. Prospective investors should consult with their own legal, investment, tax, accounting, and other advisors to determine the potential benefits, burdens, and risks associated with making an investment in any fund.
