New Innovation: Investors Seeking Exits on Startup’s Revenue

The last week we had over 25 folks who run accelerators, incubators and coworking spaces in India at the Microsoft accelerator. A few of them were individual angel investors as well.

Anyone who has invested in Indian technology startups knows that getting exits is hard. In fact in most of our discussions with entrepreneurs nearly 60% of them have the intention to never sell their company or “exit” but to build a standalone business which generates cash and employment.

Given that number, it is not hard to imagine that most angel investors are vary of investing in startups given how many of them end up as “lifestyle businesses”.

Most angel investors, though need exits and returns on their investment. This is so they can redeploy the capital and the gains in other investments.

I have seen many creative ways that angel investors have tried to get exits from their investment in India. Unlike the US, nearly 40% of Indian angel investors (according to Rehan Yar Khan of IAN) usually exit at the series A or series B stage. At this stage either the new investors or the company buys their shares out.

I heard for the first time though, about a new technique adopted by an angel investor. This investor had a preset IRR (Internal rate of return) which they agreed to with the entrepreneur and required that the entrepreneur return the investment with the gain when they start to make a certain amount of revenue.

It seems more like a debt investment than an equity investment, but it seemed to work.

I have seen many investors who put money in non technology companies who put together deals like this one, but its rare for technology companies.

I wonder, how many entrepreneurs are okay with accepting these terms as part of their investment. I suspect that if entrepreneurs get more comfortable with convertible debt to equity instruments with some form of exit criteria tied to revenues, this will become a more viable vehicle for technology startups.