The Fallacy of the Exit

Recent news on the write-down of unicorns, IPO scarcity, and what’s to come next show it’s hard to win in venture capital, and that’s why eyebrows always raise when an investor exits a startup. However, if you didn’t figure it out yet, there’s a fallacy behind exits.

Behind the mirror

Venture capital is essentially a business of failing – but failing the less possible. This fundamental principle is connected to lean practices and the reduction of waste, though incredibly dissociated from the modus operandi and public assertions of the average VC.

Regardless of their M.O., VCs like to boast about their exits. And exits, sometimes brilliant and profitable, are often an overestimated solution for a bad execution. So when you hear “we exited for an undisclosed amount” you may be hearing “we were bleeding money and sold for pennies”. There are exits and emergency exits.

Take a write-off, which is giving back invested equity for nothing. Whenever a VC goes public about a write-off, the implicit argument is often “we tried all we could, but you know… founders screw up.” Only write-offs are waste: they’re the consequence of overpricing and underperfomance combined – not one or the other. Here’s why: write-downs (investing more money for a lesser valuation) are usually the late consequence of bad funding decisions, and a lot of write-offs are write-downs that became unaffordable. Hence, The VC is as guilty as the founders (but magically excused).

This is why VCs sometimes welcome bad (undisclosed) exits as tools to achieve three things:

  • Good publicity, signaling solidity and success for the press.
  • Impress investors, making it easier to raise the next fund.
  • Partial payback, so bad investments can return part of the debt.

It’s also why you should respect any investor who says “We made a mistake” after an exit or write-off. But it can get worse: sometimes bad exits don’t even pay a fair return to founders.

Reason, not looks.

Most founders believe all investors match the same greedy archetype, but that’s far from the truth. There’s a (varying) bit in all of us that believes in empowering entrepreneurs to change the world, and be part of that story.

Despite of our personal motivation, angel investors (and sometimes early-stage funds) differ radically from big fund managers in one thing: the first manage their own money, while the latter mostly manage other people’s money. Typically overlooked, that aspect is key to determine their investment decisions and how they plan towards an exit: when you manage your own money, emergency exits are waste and unaffordable. They’re (again) bad investment decisions that shouldn’t have happened in the first place.

That’s why sometimes exits are just for looks.