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Where are the Exits Now?
They have their exits and their entrances. (As You Like It).
Of the two, entrances business start-ups are marginally easier to find at present. With stock markets, especially technology ones, flat on their backs, IPO exit routes as seen and understood only two years ago have filely disappeared. This might not trouble file companies but only because these have disappeared too, but real companies and certainly the ones with a VC-backer can’t see anything resembling a door except maybe a long way off in four or five years’ time. Why stress the stock market position? Because the other exit route – the corporate sale –becomes much harder if the corporate buyers don’t see any alternative to themselves. They in any case probably have troubles of their own. If you take the Telco sector, only Vodaphone is noticeably thinking of buying other businesses and that’s only because it’s tidying up a corner of what used to be its corporate strategy. Other Telcos are trying to shed things so as to manage or reduce debt.
As hinted above, the people who worry most about exits are the venture capitalists because they usually have self-inflicted timescales to meet and above-average expectations. They are not set up to be long-term holders of the shares of their investee companies. This works very well when stock markets are going up but becomes difficult to live with when the reverse occurs. The money and fashion pendulum swung too far in one direction so when the bubble at the end of it burst causing it to swing back, it has to go equally far the other way. How far are we in this process? A goodly way still to go if you accept that it will be another four or five years before stock markets will readily accept hi-tech IPOs. In between only something exceptionally good will get through, although there is still a little activity in the biotech area where things may be marginally less demanding.
Early-stage funding market
Although this article is directed at exits, it is hard not to spend a little time looking at the present difficulties of the early-stage funding market. The excesses of the late 90s were “too much money chasing too few really good businesses” and even the good ones have been caught by the downswing. It is, of course, arguable whether a business, no matter how fast growing, can ever justify a 400 times P/E ratio but feeding-frenzies occur and will occur again. One thing is certain, that yesterday’s high fliers will not be tomorrow’s. So where are we? Early-stage venture capital has become very difficult to find because many funders have withdrawn to what they perceive as the safety of higher ground or “later stage” and are also pre-occupied with managing their mistakes. Syndicates for second and even third rounds are almost impossible to form except from existing investors. The latter are showing genuine commitment here and not just trying to protect their backsides. No one has any compunction these days in letting a company go to the wall as money is in such short supply and needs to be conserved for the long haul over the next few years. In the USA VC funds are scaling down by handing back some of their unspent money or else are shutting up shop completely. There is still a long way to go in this process. Really talented VC managers are as rare as really good investee companies so, hopefully, the survivors will be those who know the business and have more than just money and MBA qualifications to offer their investee companies. Paradoxically there is no shortage of money in the world but only the appetite to invest it now that prices have come down.
The truth is that the VC concept fits certain types of company and not others. The latter are those which can grow from their own resources with not much working capital. Hi-tech companies with expensive development phases are somewhat different although even here less money may be an advantage since it may encourage the building of the customer base even though the Mark I version of the product is imperfect. It never will be perfect of course but selling it and stopping the boffins from tinkering becomes the priority.
Global context
The things which won’t fly at all are companies wanting to spend huge amounts of other people’s capital either to develop a market position or to build a new market place. The threat of war in the Middle East and uncertainty over the real strength of the US economy reliant as it is on the continuing enthusiasm of the over-borrowed consumer who is only buoyed up by the property market – as is also the case in the UK – will keep stock markets guessing for the foreseeable future. And what then? Germany and Japan don’t look in great shape so how long before there is some return of confidence? Maybe not until the Pundits turn really bearish. When that happens we’ll be somewhere near the bottom and we can start looking up the slope on the other side to see if we can see a row of doors marked “exit”.
In the meantime, people will have to build proper businesses with real customers and profits. This might even lead them to the conclusion that building a business is an end in itself so that by the time the doors marked “exit” do start to appear, they will prefer to hang on to what they’ve got. After all, Bill Gates is still at Microsoft and there must have been numerous opportunities for him to sell out. When you realise that doing the opposite has probably given him more money, and what is as least as important, has allowed him to retain his power base why is everybody so hooked on finding an exit route? Unless you’re a VC of course. There is a mythology which is still apparent in Cambridge thinking of building a business so that you can flog it for zillions in just a few years so that you can do it all over again. Coming up with one really good business idea in a lifetime is beyond most people’s capability. What are the chances of having two or three? Serial entrepreneurs are probably as rare as chicken’s teeth and, for the time being, exits.
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