Discussion

While TechCrunch is enamored by mega-rounds and IPO’s, most venture capitalists understand those are rare occasions. Optimizing the investment strategy for handsome returns even in the event of a moderate exit is a challenge worth thinking through. Are there little things investors can do to improve the chances of any type of exit?

When Facebook received an offer from Yahoo! For $1B dollars, Accel Partners and the other investors encouraged Zuckerberg to sell. Marc Andreessen insisted he didn’t. In an interview for the New Yorker, Zuck explained “Marc has this really deep belief that when companies are executing well on their vision they can have a much bigger effect on the world than people think, not just as a business but as a steward of humanity—if they have the time to execute.”^[1]

Beezer from Sapphire Ventures predicts the rise of secondary funds and secondary liquidity opportunities: “ stay tuned for a growing secondary market with private equity and dedicated secondary funds as willing buyers. The secondary market has already become a new reality for entrepreneurs, and we believe it will become so for venture funds as well.”^[2]

Tips and Tricks

• Make sure you invest at a valuation from which you can expect a nice return if the company sells earlier than hoped. (Cervin Ventures)

• Have a communications plan and regular meetings with a list of important corporate development professionals, customized for each company in your portfolio. (Cervin Ventures)

• Be willing to have and set clear expectations for what it will take to raise the next round of funding, and be willing to advise the company to sell rather than go through a process to raise the next round. (Cervin Ventures)

• The lack of an exit pipeline can constrain the VC market and cause a shake out and a retraction of LP capital. It’s important to set LP expectations correctly up front, to be clear about a longer time horizon.

Case Studies

Case Study on Cervin Ventures: Creating an Option for an Early Sale

In analyzing the venture landscape, the founders of Cervin Ventures came to a stark realization: while the rest of Silicon Valley chases the handful of companies that have enormous IPO and exit values, most of the transactions occur at less than $100M.

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Realizing the need for an investment strategy that creates returns from a typical exit, Cervin Ventures developed a coherent strategy: focus at the seed stage, only invest when the target ownership can be met, and model a solid return from an early sale of the company. Cervin focuses on enterprise tech, and mainly invest in areas where the the two founding partners know the potential early acquirers.

They have a communications and relationship plan for both follow on investors and for corporate development professionals. They have a quarterly round of meetings with people in these roles, and who they also consider friends and advisors to the firm. They keep them updated on developments within the portfolio, and if there are companies of interest they often do direct outreach to keep them aware of developments.

Cervin tracks their seed companies with a sense of purpose, and one of the goals is to understand if and when the company is ready to raise follow on financing. While most companies are encouraged to go on to raise a Series A, Cervin considers raising a Series B a point-of-no-return for the company. Prior to the company creating a fundraising plan for the Series B, Cervin has an conversation with the entrepreneurs about their odds, their likely valuation ranges, and the consequences of taking Series B capital. Some entrepreneurs choose to try to sell the company, rather than raise a Series B. This is where Cervin’s prior work becomes valuable: they are able to activate interest from potential acquirers, because the corporate development teams are already familiar with the company and understand its strategic importance.

Using this model, Cervin was able to see liquidity and distribute cash returns to LPs faster than other venture capital strategies. Building on their success, they were able to raise a larger second fund with little friction.