Providing early exits for early stage investors
Early stage investors struggle to achieve exits in the timeframe demanded by their funds and tie up capital that could otherwise be recycled in to new innovation opportunities:
- Early stage investors, angels and seed funds are good at exactly that: the startup phase. They are not necessarily best suited for the growth companies that we focus on but are typically tied in by later investors
- Private Equity and late stage Venture Firms worry about alignment of investor interests and seek to partner with investors able to stay with the company in later, larger rounds but are loath to allow any third party to exit from a given company until an exit is achieved for all investors: Venture Capitalists are notoriously keen to ensure that no one takes money off the table before they do
Our view is that later stage investors are missing a trick. Yes seed investors add little to growth company boards, are unable to participate substantially in larger, later rounds and create some Board friction due to objectives at odds with later investors. But this is not the main issue. More important is the potential to substantially enhance the objectives of both sides.
Seed investors become increasingly nervous as time passes. Cash has been tied up for long periods, and the chances of significant dilution increase dramatically if the seed investor is unable to participate in later rounds. A seed investor’s greatest fear is to receive nothing and they are thus prepared to accept a valuable exit now, at a discount to the value perceived by later investors, in preference to the potential for a larger return later.
Discounted share purchases in the secondaries market provides increased returns for later stage investors. And of course the recycling of cash to startups provides the fuel for further innovation.
Proof of concept
Our work with Cambridge University spinout Amantys provided for just such an outcome and we were able to provide an exit to friends and family, founders who were not critical to the business going forward, the University of Cambridge and to seed investor IP Group.