Art of the Exit
by Anthony Tjan
If you think of the venture investment cycle as finding a deal, managing a deal, and then finally “monetizing” or exiting from a deal, then an interesting question is what is the most difficult part of this investment cycle? While critical to success, the first part of the cycle — “deal flow” and the decision to invest in a company — is the easiest part. Even if you miss a good deal opportunity, another one will emerge — they tend to be like trains in that you just need to be patient as another one will come by. The middle bucket of the investment cycle — managing the deal — is the most time-consuming and requires the most work. The trickiest part, though, is often the last part of the cycle: knowing the right time to let go and sell.
At a recent board meeting, one of my colleague directors declared, “Remember, you never make money by buying, only by selling.” As obvious as that sounds, we tend to spend more time learning when to buy. Think about the legions of books and articles that focus on making you a savvier investor or more astute manager. Now think about how much you have read on how and when to sell an asset. There are too many entrepreneurial stories in which the “windows of liquidity” were sorely missed.
If the art of the exit is as challenging, or even harder, than the art of investing, what can be done? Here are five principles that might help:
1. Minimize the risk and need to sell. The first rule is to avoid the issue by smartly investing in assets with resounding long-term value and therefore very long hold periods. Buy things that have sound cash flow and where you at least in theory have “hold forever” potential. A long-term value creating mindset tends to land investors in fewer exit timing problems than a short-term value capture mindset.
2. Value maximizing will more often lead to value destruction than value satisfaction. It’s been said best in a vivid cliché: hungry pigs can get fat, but greedy pigs will get slaughtered. Don’t be that greedy pig: it just doesn’t make sense to try and go for every last nickel.
3. If you have the chance, take some chips off the table along the way. I was fortunate when a business I founded was at the dizzying heights of the dot.com craze to have an opportunity to “recap” the business. Basically, it meant a large investment for the business whereby the founders could also take some money off the table. What looked like a premature move at the time turned out to be more lucky than prescient as the markets ended up sliding with the dot.com crash. J.P. Morgan said it well, “I made all my money by selling too early.” Whether it is through a dividend, a recap, or straight sale of part or all of the company, if you have a chance to get some liquidity, take a long and serious look.
4. Remember why you liked the investment in the first place. Peter Lynch, one of the greatest investors of all time, once said, “If you know why you bought a stock in the first place, you’ll automatically have a better idea of when to say goodbye to it. When you see core elements of a business or its market change, or when you can feel its customers getting tired, it is probably time to exit. A good friend, who also happens to be one of the smartest private and public equity investors I know, tells me that he always writes down the reasons why he is making an investment. When you do that, you can look back and objectively learn from poor investment choices.
5. Follow your contrarian instincts. Some of the most successful investors look at opportunities when others are looking elsewhere. The art of the exit is similar, in that if lots of people are buying than it may be time to start to consider selling. As some of my former Harvard Business School professors have observed and shared with me, the time to get out of something is when everyone from a graduating class wants to get into it.
These have been some trying and volatile times for private and public company investors. There is no clairvoyant or simple formula to determine exactly when one should exit a company. Amateur and professional investors who are ardent students of investing should balance the workload and opt for more insights on selling. After all, aren’t you tired of the cocktail party chats about how much money someone has made on something they have not yet sold?
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