Why Smart Investors Have One Ear on the Exit

Sometimes what a company doesn’t say tells you all you need to know about whether you should invest.

By Oliver Woolley

A common complaint from investors is that they can’t realise a return on their investment because the company they invest in has no plans for an exit. But whose fault is that?

If a stranger spent 30 minutes telling you all about themselves but didn’t mention their family, you would conclude ‚Äî probably correctly ‚Äî they weren’t family orientated or didn’t have a family. Alternatively, if they spent most of their time talking about their family and little about their work, you’d conclude family was far more important to them than business or career.

The skill of listening for what isn’t said is equally important when you’re considering an investment in an unquoted company.

Who is to blame when an investor can’t realise an investment?
Companies looking for investment will often spend all their time talking about how wonderful their product or service is and how they plan to grow. They will talk about the strength of their management team, the market they’re operating in and their financials. So they should.

But they should also spend time talking about how they plan to give investors back their money. A vague nod to “selling to Google one day” is not enough. A vision for the future is a pre-requisite for a company looking for investment, but so is an eye on the door.

If a company you’re considering investing in doesn’t talk about how it plans to give you back your money, you should wonder whether they plan to at all. Waiting up to 10 years to realise an investment shouldn’t come as a surprise if the money was invested with someone who had never said they had plans to give it back to you.

What should you be listening for?
Companies seeking investment should be excited about how far they could take the company. They shouldn’t be so carried away by that enthusiasm, however, that they aren’t carefully considering possible exit strategies at the same time.

Those strategies should be part of their prospectus and presentation. In fact, they should have equal weight to the parts dealing with marketing and competition, management team and track record, and the financials.

Look for the company to talk about:

What other companies like theirs have sold in the last year or so. (And delivered a great return to investors at the same time.)
What companies they think will eventually be interested in buying them. (Trade sale is the most common exit strategy for investments in unquoted companies.)
What would have to happen for the company to become attractive for a trade sale, e.g.:
What level of sales do they need to reach?
How profitable would they need to be?
How many users or customers would they need to have?
At Envestors, we receive roughly 100 proposals a month from companies looking to raise investment. Most of them say nothing about the exit plan for investors. Some of the rest make no more than that vague reference to selling to Google or the 800lb gorilla in their particular industry.

Very few will have laid out their thinking on the points listed above, but they’re the ones we spend most time listening to.