Build Your Alpha via an Exit Road Map


This post was written by John Huston, ACA Chairman Emeritus and Founder & Manager of Ohio TechAngels.

At GUST’s June 17-18 Venture Forward Conference in New York City I enjoyed being a panelist with David Hornik (August Capital) and Bob Rice (Bloomberg’s alternative investment expert and The Alternative Answer author). Dave represented the top echelon of VC firms; Bob pointed out how few of Dave’s brethren share his success.

Our discussion surfaced how vastly the exit expectations of my angel group (Ohio TechAngels) differ from those of the top tier VCs. We are delighted to reap smaller returns (3 – 10X) if they consistently occur before five years. I explained that during our 9 ½ years of investing, we have always presumed our liquidity events would occur via an M & A event, never an IPO. We focus on how we can help our entrepreneurs orchestrate their sale, which we view as the ultimate alpha builder.

Of the several metrics used to evaluate mutual fund managers’ performance, alpha is one of the most important. Investopedia defines alpha as: “A measure of performance on a risk-adjusted basis” but it broadly refers to the value an asset manager adds via skill and effort. It is a convenient way to think about how much useful impact an angel group (or a Director of an angel-backed venture) provides shareholders.

Unlike most mutual funds’ holdings, angel investments are illiquid. Standardized performance metrics are not readily available. Nonetheless, when highly courted entrepreneurs are choosing among potential investors, they often inquire about the benefits an angel group will provide along with its cash.

I encourage angels to assess their demonstrated alpha so they have a ready answer to this question. Reflecting on this three summers ago, 30 of the 282 members of Ohio TechAngels formed an Outcomes Committee to build our alpha.

In our early years, we were busy honing our deal sourcing and vetting disciplines, and the time we spent before we invested vastly exceeded our post investment involvement. The value our investors derived from our due diligence process was transitory. It helped our entrepreneurs tighten their pitch and build a data base of files and answered questions to aid our co-investors. However, our up front effort added no value after the closing.

Delivering ongoing alpha on behalf of our group is mainly the task of our fund members who sit on portfolio companies’ Boards of Directors. To improve their performance the committee recommended an “Angel Directors Training Course” and several director tools. (The course for directors is now available from the Angel Resource Institute; inquire about “Navigating the Boardroom”).

As our Outcomes Committee built the 40 tools and templates, the one which consumed the most effort was a set of steps to speed the pace and raise the odds of consummating a lucrative company sale. Committee members pooled their M & A experience, manuals, and checklists. Then they reviewed the three most widely read books on angel exits: Early Exits (by Basil Peters); Strategic Entrepreneurship (by Jon Fisher), and Ultimate Exits (by Dr. Tom McKaskill). We call the resulting eight step process our “Exit Roadmap” and we give it to our entrepreneurs prior to due diligence.

You can download the 52-page manual here.

Our pathway to an orchestrated exit relies on these four precepts:

  1. Great exits start with great entrances, so goal congruence among investees and investors is mandatory. The roadmap sends a clear signal of investors’ expectations.
  2. We want our portfolio companies to build value which is alluring to strategic buyers, not financial buyers. Focusing on building significant EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) reveals that management’s goal is to attract financial bidders. This will preclude achieving our 58% IRR (Internal Rate of Return) hurdle because growing EBITDA consumes far too many years and definitely too much capital.
  3. Focus portfolio companies on enhancing their value in the minds of potential strategic buyers instead of growing shareholders value as shown on the balance sheet. The company’s value is not knowable until the winning strategic bidder’s wire transfer arrives at the closing (and hopefully the amount is completely de-coupled from any accountant’s numbers).
  4. Allocate resources to develop buyers’ value. Other expenditures squander investors’ capital.


Does the Exit Roadmap work? If it worked every time the Ohio TechAngels would reconsider providing it gratis to ACA members! However, we have found the discussions it requires with management cause continuing goal alignment plus provide a lens through which to view resource allocations. And, if taking the eight steps results in selling the company to the highest strategic bidder, is that not the ultimate alpha builder?

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