In the course of doing EIS fund reviews, I come across lots of claims that are unprovable. In some cases, it is straightforward to assess how reasonable this is. For others, it is harder to form a strong opinion one way or another. One of these is how long it will take for investors to get their return, or how long will it take for managers to achieve successful exits.
In the new world where managers are only making proper venture investments, most give guidance in the five- to seven-year range. Some say a bit less but very few suggest it will be longer. Then I saw this blog post from Fred Wilson, a well known Silicon Valley VC . He reckons it takes seven to ten years to get meaningful liquidity from early stage investments. Mmm?
What does the data say?
Now part of the issue is that data sets from EIS managers are limited to say the least. Even those that are a decade or more old don’t have as much as we would like. Partly this is because most start small, so don’t have many companies that have had investment for more than a decade. Of the funds I have reviewed, only two have more than 10 exits (including failures). Wilson has a sample of over 1000, which is much better than any managers here have.
I have referred before to a joint Beauhurst / SyndicateRoom analysis. This is now up to seven years old, so may give some data. Of 519 companies, 73 have exited and 73 have failed, so 28% have exited. This figure comes with lots of health warnings. Its not just (S)EIS investments. It is not clear that all investments will be seeking an exit. It probably includes some ‘capital preservation’ products that should give a shorter exit. And, as I referred to before, the dataset is far from perfect. So its probably not a very precise estimate, but it does suggest 5-7 years is a bit optimistic.
Beauhurst also did a more recent study with Newable on 2013 data. This uses 2013 data on 1229 companies. It has an exit rate of 7% and death rate of 13% of companies to 2018, so comparable with the other study.
Conclusions
Usually I like to have some nice strong conclusion, but I don’t have that here. Basically the data is just weak. Though what there is seems to not support the claims managers are making, it doesn’t make them wrong. Some say they are making later-stage investments and this justifies the shorter timescale. That may be true, but much of the scale-up capital is going in just after product-market fit has been reached. This isn’t late stage investing. Investors (and me!) should perhaps be probing deeper into this claim. And if anyone has better data then let me know!