Ask Prospective Investors About the Ideal Exit

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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.

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