Ask Prospective Investors About the Ideal Exit

Black-backed Jackal and Cheetah
Image by Sergey Yeliseev via Flickr

Yes, the ideal exit for a prospective investor is going public and having a $170 billion market cap like Google. In reality, the more likely exit is via acquisition by a larger company at a much smaller value. It is critically important to find out and align expectations with a prospective investor as to what the ideal return looks like as well as the minimum exit value for it to be worth their time. Here are some questions to ask:

  • What type of cash on cash multiple do you shoot for? Minimum acceptable?
  • What internal rate of return do you shoot for? Minimum acceptable?
  • What percentage of your total fund do you look to return to your limited partners (LPs) on any single deal?

That last question is especially important as the larger firms result in a larger amount. As an example, say the fund is $200 million and the investor looks to return a minimum of 10% of the fund on any one deal, that’s a minimum of $20 million for the investor’s stake in the company. Say the investor will have 25% of the company, that means that the company needs to sell for $80 million for the investor to return the amount of money that is meaningful to their LPs.

My recommendation is to ask these three questions when talking to potential investors to learn about the type of returns that will make it worth their time.

2 thoughts on “Ask Prospective Investors About the Ideal Exit

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.