The Curse of a Modest Exit

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Angel Investing


You hear about extreme outcomes all the time—the huge exit or a company shutting down. Recently, I got to observe a much more rare event: a company exiting at a modest valuation. The impact on both the team and investors was illuminating.

The company in question built mobile apps for a particular sport, and had 3 million downloads with nearly 2 million active users. I had been an advisor to the team on a periodic basis. We never did really figure out how to monetize the app itself, but the team kept up a weekly email dialogue with active users. They shared sports tips, the latest app updates, and feedback from other users. That eventually morphed into a valuable channel for highly focused ads targeting their sport. It became a real source of revenue for the company.

About 18 months after they had raised an initial seed round, a buyer materialized. They were focused on the same sport and saw real value in the ongoing relationship with 2 million hard core players. The team hammered out an agreement, and the deal was done.

The amount was modest. The team would make some money, but would have to work through an earnout with the acquiror. Investors would get their money back plus 25%. (I’ll spare you the financial gymnastics, but the team was more generous with investors that they were required to be.) No great fortunes were established, but it was nevertheless a substantial success, given the 95% failure rate for startups.

Everyone was depressed.

The team felt like failures even though they had beaten some ugly odds. Angel investors, some of whom I had personally witnessed calmly losing six figures on failed ventures, were seriously annoyed. Why?

The founders and investors were all mentally prepared for both the best and worst case outcomes, but no one had seriously considered what happened if there were a modest exit.

We all know that the odds of a dramatic success are downright terrible, but believe we’ll be one of the winners. If you didn’t believe that, you couldn’t be a founder or angel investor. Likewise, we all accept that there will be failures that return zero, but assume it won’t happen to us. At least not too often.

This experience led me to ask some questions:

Does every angel investment have to be a home run? For investors? For entrepreneurs?

Is swinging for a home run the only way impactful innovation happens or is there another path? DuWayne Peterson, founding chairman of the Pasadena Angels, told me we should be targeting companies that needed modest capital to hit a 3-5x outcome. He believed those opportunities were overlooked by other investors, and represented a chance for a fine return. I think he was right.

Likewise, if a founding team can record a win and make some money, they are perfectly positioned for their next company. The investors that backed the company I mentioned would cheerfully write checks to fund the team’s next venture. The impression they left was a good one—a positive return and honorable behavior. That’s not a bad place to be.

Is a team who takes a moderate outcome giving up too early?

Perhaps the option of a moderate outcome is simply market feedback that your idea is moderately good, but not a home run. Most startups never get that far. The traditional wisdom would say don’t take a moderate outcome, don’t bail early! Stay in and fight for something bigger! But there is a tough question here. Are you rolling the dice with other people’s money to boost egos or because you really think you can be the next Google? I think the team made the right call in this case.

This management team took a hard, realistic look at their business, and decided it was time to sell. It was a courageous move. We all could take a lesson from their disciplined approach.



  1. Hi Steve,

    Enjoyed your article on ‘The Curse of the Modest Exit’. I’ve been involved with many start ups that would have been great *if* they didn’t have stars in their eyes about raising millions and having a blockbuster exit. There are lots of good ideas that can turn into great companies that just might not be VC fodder. Raising too much money makes a company exit less likely. And you never know – better to go organic and have something sustainable than swing for the fence and strike out? Anyway, hope you encourage some new companies to just get profitable even if they don’t get filthy rich in a hurry.



    (fellow TCA guy, friend of Yuri, SoCal Tech start up lover, etc – latest venture is with my youngest son (now 17 and applying to colleges)…helping pay for college, but probably not a grand slam potential!)

    • Cliff,

      Thanks so much for taking the time to comment.

      I was just in a meeting where a young CEO was contemplating a modest raise, followed by profitability. He was severely chastened by his experiences in 2008-9, and is focused on building a nice, profitable $25mm revenue company with expansion potential. Music to my ears. Maybe all that pain in the ‘oughts taught us all a few valuable lessons.

      Thanks again for your comments.

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