I analyzed the results of several angel networks and found that 65% of the investments after three years were still in business but were no longer on the venture track. In most cases, they were growing businesses but were not going to be bought out for a significant return to the investor as the market conditions had changed, the competition had taken over, or the founder was no longer interested in keeping pace to achieve a venture exit.
The best-case scenario was the entrepreneur would sell the business for 2 to 3X after 10 years in which case the investor would get a minimal internal rate of return.
In my investing experience, three years into the investment it became clear if the company would remain on the venture path or not. This was due to competition in the market, a difficult fundraising environment, or just plain poor performance by the company.
I often saw the entrepreneur signal their departure from the venture path by taking above-market rate salaries. I called this taking the “payroll exit” in which case they no longer needed an “equity exit”. This left the investor stranded on the equity plan with no way out.
Since there is no liquid market for private company shares of this type any effort to negotiate a buyout with the startup team was met with a firm ‘no’ or an offer in the range of ten cents on the dollar.