Exit Price, Not Entry Price
AI art by ChatGPT
Most investors have to focus on their Entry Price.
Venture investors must focus on Exit Price.
Venture Capital is in many ways the opposite of every other type of investing.
Talking with real estate, public equity, or Private Equity investors and you will often hear them moaning in ecstasy over their entry prices.
In venture, the opposite is true. Very rarely does anyone talk about how great of a bargain they got on the Anduril Seed Round or the Tesla Series A. They talk about the exit price. The scale that the company grew into.
Why?
Because in venture the returns mostly come from the scale of wins, not the ratio of wins-to-losses.
As Bill Gurley puts it — “Venture Investing is not just a home run game, it’s a grand slam game.”
Jeff Bezos goes even farther: “That analogy does not go far enough – no matter how well you connect with the ball, you can only get 4 runs. But in business, every once in a while you hit the ball so hard you get 1,000 runs.”
The Venture Investing business is about investing in those massive potential returns. The swings that could return 1,000x.
Selecting for Exit Price is the primary goal of a venture investor.
At a recent event, I spoke alongside another early stage investor. He mentioned his focus on disciplined entry prices, because “you can’t control the exit price, but you can control the entry price.”
The notion may appeal to conservative LPs (and perhaps that was the point of the statement), but I there are important ideas to unpack here.
“Control” — What does ‘control’ really mean here? Markets set prices, no individual really gets to control them. They can only control what they do when presented with a price.
“You can control Entry price” — I’d say that’s false. 80% of venture investors are price takers. In practice the price is set by leads and founders, and everyone else just says Yes or No. If you say “No” due to price to a company that will 1,000x… that’s an error.
“You can’t control Exit Price” — True that you don’t get to set your Exit Price, even as a lead investor. But you can control only investing in companies with the potential to grow multiple orders of magnitude.
That’s the job.
Again, Selecting for Exit Price is the primary goal of a venture investor.
I wrestle with these ideas because it’s critical that Venture Capital continues to Venture.
The focus on controlling Entry Prices is another manifestation of Venture Capital being muddied, MBA-ified, and conflated with Software PE, Bootstrap Capital, or small business investing.
True Venture Capital—especially at early stages—is about capitalizing scientists, engineers, and pioneering entrepreneurs who are building new capabilities for humanity. It is not about making careful risk-adjusted spreadsheet-driven investments that have 50% odds of going 5x with some incremental improvement.
No shade, of course. You do you and go make your money. But don’t call it Venture Capital
We’ll keep investing in obsessive geniuses building utopian technologies — and we’ll see whose portfolio looks the better in 20 years.
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