Listen to the interview here:
http://thefrankpetersshow.com/2011/scotlands-nelson-gray/
We cover a lot of ground but the key points relate to the need for a more strategic approach to planning Exit Strategies:
From the blog of Frank Peters:
“It’s the exit strategy for too many entrepreneurs: “Google’s likely to buy us.” As an angel investor I’ve heard this many times, and, who knows? It happens occasionally, so like a rat in a maze, the entrepreneur continues to search for this piece of cheese even though statistically it’s rare.
In the past week we’ve seen Google announce a multi-billion dollar acquisition of Motorola Mobility; if you had their cash you’d be elephant hunting, too. Like large VC funds, they have too much money to be looking at sub-100 million dollar deals, let alone sub-20. Meanwhile entrepreneurs dream.
My latest interview with Scotland’s Nelson Gray shows that this “Waiting for Godot” syndrome is a global phenomenon. At least in Scotland, angels like Gray can dispute this exit fantasy by simply asking: “just how many Scottish startups has Google acquired to date?”. Answer, none; it’s more likely to be struck by lightening. Other guests confirm this; Kevin Covert of Covert & Company described why angel groups see so few exits: “it’s hard for large companies to acquire some of these small companies and have it move the needle.” Little deals don’t do that for big companies; little deals might do that for smaller companies.
The whole concept of determining the exit before making the investment is a relatively new one. Basil Peters, no relation, and his ground breaking book Early Exits was like a slap in the face. Or was it more like the kiss that broke the spell? Either way, angel investors had to wake up to the fact that most deals exit for relatively small amounts, like $15 to $20million. So the home run is more rare, but the opportunity to grow a company quickly and get a nice return, that possibility exists and it’s worth focusing on from the very beginning, before you write a check. Sounds so reasonable, right? But this was an earth shattering insight for many angel investors. Speaking just for myself, I would make a typical angel-sized investment then sit back and wait for venture capital to come along, hopefully just before the company ran out of cash, to make the next raise and take the deal away from us. As I’ve heard from so many VCs, “hope is not a strategy,” yet in angel circles this was common practice. It’s only after a decade of dismal returns in our early-stage portfolios are we forced to reconsider our approach.
Advice to angel investors: understand who will acquire your darling startup before you write that first check, and sorry, Google isn’t a realistic target. Same for HP.”
