I have noticed that VCs tend to talk to the public and with their peers more about their home runs than their strike outs. Angel investors, on the other hand, prefer to relentlessly revisit their pain—often comparing their battle scars like veteran samurai. Probably because angels put up their own capital. Because they truly do eat their own cooking it’s harder for angels to forget their fallen soufflés.
VCs achieve their highs from the opium of OPM…so even a bad trip is still a free trip.
I recently had lunch with an inveterate venture investor (aka “angel”) whom I had co-invested with in a biotech, as well as, a med-tech company, several years back. Our conversation inevitably turned to peck at our past portfolios.
The biotech company was a true home run—a high-multiple exit realized in a 2004 IPO. (When was the last time you saw biotech, high-multiple and IPO in the same sentence?)
But, rather than relishing in a reminiscence of our raison d’être, we chose to get muddy in the mire of our miss—the medical device company that (nearly seven years later) was still trudging along with neither an exit, nor a write-off in sight.
There is the baneful scenario–five or more years in an illiquid private investment that just keeps rolling over but never plays dead, and, there is the painful scenario–a company running profitable for several years straight but no IPO, acquisition or distribution on the near horizon.
Two questions dominated our discourse. First, what would become of the med-tech investment? And secondly, what can we do differently as investors to avoid non-outcome outcomes in the future?
My most previous venture ovation opined, “There is very little that is binary about venture investing outcomes. It is not just feast or famine…outcomes are diverse and asymmetric. You can lose your entire investment, just lose a portion, break even, receive periodic distributions producing double-digit IRRs or achieve exits at 5X, 10X, 20X multiples or greater…”
That list of outcomes would be just fine if it was indeed comprehensive, but I employed some autistic license. The reality of the absence of binary outcomes in private venture investment occasionally includes the potential absence of any outcome at all.
In an amusing piece “10 Exits”, Angel Capital Association’s chairman John Huston further parses this purgatory. He evokes the venture vernacular “Zombie” as “a walking dead venture that will never become a great company, nor will it die so I can declare the loss.”
There are a number of ways to euthanize a zombie but what do you do about the investment that Huston calls, “My Grandkids’ Company…a company that is successful but there’s no exit in sight”? (“Maybe it will occur after my grandchildren inherit the portfolio.”)
That is the second question, and yes, there are methods that an investor can apply at the outset of the investment that mandate distributions from profitable private companies.
I have developed some effective term sheet and funding mechanisms that enhance the optionality of a private investment’s outcomes that avoid inadvertently gifting your grandchildren. I will share them in upcoming posts. They are the byproduct of my own experiences, and as you know, experience is what you get when you were looking for something else.
Album: Hits and Exit Wounds, Alabama 3, 2008
Popularity: 2% [?]
