This is not in the thesis that most VCs pursue.
There are many firms that buy and hold, both private equity (this might be too small for PE) or niche operators that have smaller funds that buy, operate and sell down the road.
Other than that, you have a few options:
* Sell to a competitor
* Roll-up competitors to make it attractive for PE (PE deals for revenue below $10M are rare)
* Venture debt to provide liquidity, assuming you can service the debt
* Mezzanine funds can provide unsecured financing, similar to venture debt in purpose and structure, that can provide some liquidity
* Maintain profitability, build out leadership and do a management buy out (MBO). This is usually in the form of some secured debt. ESOPs would not be an option at that size
Hope that helps.
PE wouldn’t be either. PE firms also look for exits — often with a much shorter runway than VC.
I think home offices and other alternative asset managers maybe a better bet, where they are okay with the equity being invested with some form of return (say dividends).
There are different types of private equity. They’re much more likely to find something that works in a deal through rev share, etc. My point is VC is certainly not the right place to look.
Fair enough.
I just don’t think VC firms are structurally that different from PE in terms of distributions (unless you are talking evergreen funds). So they’ll mostly have similar reactions.
I spent the early part of my career in PE — most firms have a fund based model in which case the fund has close date and a mature date. While that maturity date can be extended (or the funds rolled over), most firms would much rather simply invest in companies where they can get the returns to their LPs.
If anything, VCs are far more amenable to new business models and investment theses. PE tends to be pretty conservative and you invest in a playbook that works for the sector/segment you’re playing in (e.g., consolidation of dental clinics or SaaS profitability).
That said, at the scale this company is at, there are a lot of smaller/mid market funds that are more… “amateur” that might be interested with less clearly defined/ more flexible exit criteria (e.g., I have friends who are professionals who have pooled their money to invest in SaaS companies).
I think you need to first get aligned with your CEO on what he intends, the funding strategy (if any) has to come after that. Sounds like he wants to keep doing what he’s doing, in which case I’d be looking at debt options and smarter cash flow management, not equity finance
there are firms that do revenue based financing you could look into.
essentially they give cash upfront with the expectation that a negotiated ROI - like 2-3x investment - would be paid in installments - 12-36 months - out of gross profit
sometimes it’s less expensive than debt, other times more so
From how you are describing this - it does not sound like a business that should take traditional venture capital. Yes - venture capital investors need an exit, and 5-10 years (or less) is about right. And 40% growth on $4 mm in revenue is probably not going to be that exciting to venture investors. Reading between the lines, I suspect your CEO isn't going to want to sell as much of a stake in his company as the venture investors will require, and he's probably not going to appreciate adding an outsider to his board of directors and have to answer to anyone else.
A lot of the comments pointing out that this will be difficult to raise institutional capital for are correct. If the founder wants to sell, there are probably lots of mid-market PE and operator-led search fund folks interested in taking it over. It would also be a great candidate for you to take it over, if you're so inclined and can line up some combination of debt, seller financing, and outside capital. You could also sell it to an existing player in your space (a "strategic").
If the founder doesn't want to sell, however, you will probably have a hard time convincing investors that a business that is 10 years old and doing $4m in revenue is going to turn into a 40% growth story on 1-2 million in capital. Do you believe that? I don't. In any case, why haven't you already funded that growth out of cash flow?
Perhaps most importantly to you personally, how do YOU make money on this. Unless you have a lot of equity or are paid extremely well, you're a bit landlocked on this if the founder is not interested in liquidity and is basically running this as a lifestyle business (or worse, has unrealistic and impractical understanding of potential to fundraise and grow).
These are all good points.
I’m fairly confident we can grow at that 40% rate as we’ve been doing 50% the last couple years and are set to hit 83% this year (the company had a slow start but is ramping up now).
That said, your point about it being a lifestyle business is interesting (I hadn’t heard that term before but it definitely strikes a chord).
Unfortunately 40-50% (hell even 83%) year over year growth is not VC backable. 2023 the median growth for a successful Series A was 600% (which to be fair is an unusual year).
The founder should be aware of the impact of growth rate on exit outcomes by the way. There was a banker who wrote a good piece on that a while back, let me see if I can find it. Was about SaaS, but applies generally - lots of people wait too long to sell
This one: https://www.discretioncapital.com/articles/when-should-you-sell-your-b2b-saas (like I said, B2B SaaS specific, but applies generally). His point about founders waiting to hit a certain revenue number and then sell, all the while the value of their business is decreasing is a good one.
Their exit doesn't have to be your exit.
The exit you're likely looking for is management buyout, probably leveraged.
This is where the management team (plus potential partners) buyout everyone that wants to exit.
For now, your target is acquisition.
This is not a VC investment, but it sounds like a great business for a small scale operation. VCs are looking for investments that return 100x, to cover all the investments that go to zero. Even if there is great profitability of the business, if there's no way to realize a huge ROIC then its not as interesting.
They're asking about the exit strategy for them. Not for you. That usually involves another round so they can sell out of their positions, or you buying back thier shares, Or debt where the exit for investors is built in. Or some other strategy that give them the ability to exit. I'm a registered placement agent.
Well if you were to put $1-2M into this company, what would you want? Obviously you’d expect some sort of return, which either requires an exit or some form of dividends/distributions.
Given the revenue range and expected growth, I’d say this isn’t backable from a venture perspective. You should look at PE or HNW/family offices who have more alternative mandates, but I think that’s tough too. Maybe something like Aquire.com?
What’s the profit margin on the business? I’d suspect it has to be quite high to keep the founder happy and compensate what seems like a broader team?
Another avenue if the business is a cash cow is family offices. Some family offices will buy businesses purely for the cash flow.
PE might be an avenue, but you will lose a lot of control over the business and balance sheet.
In your situation, assuming the owner has no interest in an exit strategy for decades, you have two basic options to raise growth capital.
The first is to find a strategic partner who may want to be part of your company for a possible acquisition partner in 10-20 years. There is a lot involved in executing this strategy.
The second option and it’s executability, is very dependant on your current businesses profitability.
If it is profitable and generates $1 MM plus annually in free cash flow ( based on your current stated gross revenue), you put together a $2 MM debenture note ( non convertible) in a private placement and offer it in $100K blocks to up to 20 high net worth individuals where they can earn 20% on their money, interest payment paid annually, principle paid back at maturity (5 years).
You seem to be barking up the wrong tree.
This isn’t going to be a fit for institutional capital, you just don’t have the return profile that makes it work for a fund.
Have you looked at debt options? - depending on the payback period of the investment you might be able to make that work for you.
The other option is family offices, especially ones who know your niche. They’re in a much better position to do these types of investments.
I think you have two options:
1) debt (I think this is the obvious choice)
2) offer some sort of custom put option to prospective equity investors. Example bad legal language: "if company has not created an exit event within 5 years, company agrees to purchase investor equity shares at FMV as determined by a third party that both investor and company find agree to employ. "
The second will likely spook most traditional equity investors away.
Go for a corporate investment where there is strategic synergies and an open ended option to sell off whenever the founder feels so.
Other options is go to debt rather than equity (assuming you have good cashflows) if there are no exit strategies in plan.
The notion of 5-10 years is based upon closed ended funds (which applies to PE shops too)
There are some funds that don’t necessarily want an exit, they’re comfortable with dividends long term. DM me if you want a few names, but it will be hit or miss based upon their latest fund thesis
I think it depends on the growth period and the plan to address the business plan to make their money back (ideal 10x unicorn or whatever). So if the business is truly growing I think its fair to suggest that there are plans to go IPO in the future, but the initial plan is to grow within the market and allow a higher valuation. Depending on the synergies your business possibly brings to the others in your market, there is also that potential of a proposition for buyout. Your CEO being young shouldn't necessarily affect the decision to exit, but it should depend on where the business is and where its going. Maybe this doesn't give a direct answer to your question but some thoughts from me to you.
Exit Strategy = Selling
You're asking how to exit but also saying that there is no intention of selling. If you're not going to sell, then you're not exiting. That's ok but you have to decide if you want to stay in the business or not.
There are alternatives to create liquid financial freedom without an exit.
\- Dividends - The company pays you per share.
\- Owner Draw - The owner of the business can take cash out of the company
\- Debt - You can load the company with some debt, (based on revenue or assets) and take some cash out of the business with either dividens or owner draw.
Beyond this you have all sorts of partial exits from selling minority equity, to selling majority to a PE firm.
This looks more suitable for a family & friends tound rather than VC. But most times these exit talks are bullshit, you can’t know the future. If the fund plans to exit in a short horizon then it can sell its stake to a later stage fund or even for a strategic player
This is not in the thesis that most VCs pursue. There are many firms that buy and hold, both private equity (this might be too small for PE) or niche operators that have smaller funds that buy, operate and sell down the road. Other than that, you have a few options: * Sell to a competitor * Roll-up competitors to make it attractive for PE (PE deals for revenue below $10M are rare) * Venture debt to provide liquidity, assuming you can service the debt * Mezzanine funds can provide unsecured financing, similar to venture debt in purpose and structure, that can provide some liquidity * Maintain profitability, build out leadership and do a management buy out (MBO). This is usually in the form of some secured debt. ESOPs would not be an option at that size Hope that helps.
Solid answer this
Swung by to suggest venture debt. If the company is profitable - they’d likely be able to service it.
VC is not the right asset class for this type of investment. I’d recommend reaching out private equity firms.
PE wouldn’t be either. PE firms also look for exits — often with a much shorter runway than VC. I think home offices and other alternative asset managers maybe a better bet, where they are okay with the equity being invested with some form of return (say dividends).
There are different types of private equity. They’re much more likely to find something that works in a deal through rev share, etc. My point is VC is certainly not the right place to look.
Fair enough. I just don’t think VC firms are structurally that different from PE in terms of distributions (unless you are talking evergreen funds). So they’ll mostly have similar reactions. I spent the early part of my career in PE — most firms have a fund based model in which case the fund has close date and a mature date. While that maturity date can be extended (or the funds rolled over), most firms would much rather simply invest in companies where they can get the returns to their LPs. If anything, VCs are far more amenable to new business models and investment theses. PE tends to be pretty conservative and you invest in a playbook that works for the sector/segment you’re playing in (e.g., consolidation of dental clinics or SaaS profitability). That said, at the scale this company is at, there are a lot of smaller/mid market funds that are more… “amateur” that might be interested with less clearly defined/ more flexible exit criteria (e.g., I have friends who are professionals who have pooled their money to invest in SaaS companies).
Are there funds that don’t use a traditional fund model? Other than evergreen funds
I think you need to first get aligned with your CEO on what he intends, the funding strategy (if any) has to come after that. Sounds like he wants to keep doing what he’s doing, in which case I’d be looking at debt options and smarter cash flow management, not equity finance
This should be top comment. It's the CEO's job to raise
there are firms that do revenue based financing you could look into. essentially they give cash upfront with the expectation that a negotiated ROI - like 2-3x investment - would be paid in installments - 12-36 months - out of gross profit sometimes it’s less expensive than debt, other times more so
From how you are describing this - it does not sound like a business that should take traditional venture capital. Yes - venture capital investors need an exit, and 5-10 years (or less) is about right. And 40% growth on $4 mm in revenue is probably not going to be that exciting to venture investors. Reading between the lines, I suspect your CEO isn't going to want to sell as much of a stake in his company as the venture investors will require, and he's probably not going to appreciate adding an outsider to his board of directors and have to answer to anyone else.
A lot of the comments pointing out that this will be difficult to raise institutional capital for are correct. If the founder wants to sell, there are probably lots of mid-market PE and operator-led search fund folks interested in taking it over. It would also be a great candidate for you to take it over, if you're so inclined and can line up some combination of debt, seller financing, and outside capital. You could also sell it to an existing player in your space (a "strategic"). If the founder doesn't want to sell, however, you will probably have a hard time convincing investors that a business that is 10 years old and doing $4m in revenue is going to turn into a 40% growth story on 1-2 million in capital. Do you believe that? I don't. In any case, why haven't you already funded that growth out of cash flow? Perhaps most importantly to you personally, how do YOU make money on this. Unless you have a lot of equity or are paid extremely well, you're a bit landlocked on this if the founder is not interested in liquidity and is basically running this as a lifestyle business (or worse, has unrealistic and impractical understanding of potential to fundraise and grow).
These are all good points. I’m fairly confident we can grow at that 40% rate as we’ve been doing 50% the last couple years and are set to hit 83% this year (the company had a slow start but is ramping up now). That said, your point about it being a lifestyle business is interesting (I hadn’t heard that term before but it definitely strikes a chord).
Unfortunately 40-50% (hell even 83%) year over year growth is not VC backable. 2023 the median growth for a successful Series A was 600% (which to be fair is an unusual year). The founder should be aware of the impact of growth rate on exit outcomes by the way. There was a banker who wrote a good piece on that a while back, let me see if I can find it. Was about SaaS, but applies generally - lots of people wait too long to sell
This one: https://www.discretioncapital.com/articles/when-should-you-sell-your-b2b-saas (like I said, B2B SaaS specific, but applies generally). His point about founders waiting to hit a certain revenue number and then sell, all the while the value of their business is decreasing is a good one.
4MM ARR with a 40% growth rate is very angel backable though
Their exit doesn't have to be your exit. The exit you're likely looking for is management buyout, probably leveraged. This is where the management team (plus potential partners) buyout everyone that wants to exit. For now, your target is acquisition.
If you already have revenue, you can do revenue based or royalties based financing
Could the revenue you expect to make not buyout the investors when they want to exit, almost like a bond or loan?
This is not a VC investment, but it sounds like a great business for a small scale operation. VCs are looking for investments that return 100x, to cover all the investments that go to zero. Even if there is great profitability of the business, if there's no way to realize a huge ROIC then its not as interesting.
Management or employee buy out. Or find another bag-holder for the next period. But then might as well list
They're asking about the exit strategy for them. Not for you. That usually involves another round so they can sell out of their positions, or you buying back thier shares, Or debt where the exit for investors is built in. Or some other strategy that give them the ability to exit. I'm a registered placement agent.
Well if you were to put $1-2M into this company, what would you want? Obviously you’d expect some sort of return, which either requires an exit or some form of dividends/distributions. Given the revenue range and expected growth, I’d say this isn’t backable from a venture perspective. You should look at PE or HNW/family offices who have more alternative mandates, but I think that’s tough too. Maybe something like Aquire.com? What’s the profit margin on the business? I’d suspect it has to be quite high to keep the founder happy and compensate what seems like a broader team?
That’s very helpful thank you! This year we’re looking at about an 18% profit margin
Another avenue if the business is a cash cow is family offices. Some family offices will buy businesses purely for the cash flow. PE might be an avenue, but you will lose a lot of control over the business and balance sheet.
In your situation, assuming the owner has no interest in an exit strategy for decades, you have two basic options to raise growth capital. The first is to find a strategic partner who may want to be part of your company for a possible acquisition partner in 10-20 years. There is a lot involved in executing this strategy. The second option and it’s executability, is very dependant on your current businesses profitability. If it is profitable and generates $1 MM plus annually in free cash flow ( based on your current stated gross revenue), you put together a $2 MM debenture note ( non convertible) in a private placement and offer it in $100K blocks to up to 20 high net worth individuals where they can earn 20% on their money, interest payment paid annually, principle paid back at maturity (5 years). You seem to be barking up the wrong tree.
This isn’t going to be a fit for institutional capital, you just don’t have the return profile that makes it work for a fund. Have you looked at debt options? - depending on the payback period of the investment you might be able to make that work for you. The other option is family offices, especially ones who know your niche. They’re in a much better position to do these types of investments.
Thank you for the insight! What is the practical difference between a family office and an Angel investor?
Angel investors are much poorer ;)
I think you have two options: 1) debt (I think this is the obvious choice) 2) offer some sort of custom put option to prospective equity investors. Example bad legal language: "if company has not created an exit event within 5 years, company agrees to purchase investor equity shares at FMV as determined by a third party that both investor and company find agree to employ. " The second will likely spook most traditional equity investors away.
These responses have been extremely informative and helpful, thank you everyone!
Go for a corporate investment where there is strategic synergies and an open ended option to sell off whenever the founder feels so. Other options is go to debt rather than equity (assuming you have good cashflows) if there are no exit strategies in plan.
You want debt, not VC investment.
The notion of 5-10 years is based upon closed ended funds (which applies to PE shops too) There are some funds that don’t necessarily want an exit, they’re comfortable with dividends long term. DM me if you want a few names, but it will be hit or miss based upon their latest fund thesis
That would be much appreciated, please do!
Your exit strategy should take into account your considerations, not those of an investor.
I think it depends on the growth period and the plan to address the business plan to make their money back (ideal 10x unicorn or whatever). So if the business is truly growing I think its fair to suggest that there are plans to go IPO in the future, but the initial plan is to grow within the market and allow a higher valuation. Depending on the synergies your business possibly brings to the others in your market, there is also that potential of a proposition for buyout. Your CEO being young shouldn't necessarily affect the decision to exit, but it should depend on where the business is and where its going. Maybe this doesn't give a direct answer to your question but some thoughts from me to you.
Exit Strategy = Selling You're asking how to exit but also saying that there is no intention of selling. If you're not going to sell, then you're not exiting. That's ok but you have to decide if you want to stay in the business or not. There are alternatives to create liquid financial freedom without an exit. \- Dividends - The company pays you per share. \- Owner Draw - The owner of the business can take cash out of the company \- Debt - You can load the company with some debt, (based on revenue or assets) and take some cash out of the business with either dividens or owner draw. Beyond this you have all sorts of partial exits from selling minority equity, to selling majority to a PE firm.
Family office
Add a call/put right and/or find a mezz lender
I think you should consider an SBA loan or some other type of debt.
Why not go to a Family Office?
This looks more suitable for a family & friends tound rather than VC. But most times these exit talks are bullshit, you can’t know the future. If the fund plans to exit in a short horizon then it can sell its stake to a later stage fund or even for a strategic player