Venture investing is a patient game. You invest, and then wait for many years (anywhere from 7 to 12 years, and sometimes even longer), and if you’re lucky enough to invest in a company that compounds year over year, you can generate significant returns in the process. Those returns are most significant in the last years of a fund’s life, since you capture the full nature of compounding. In those rare cases, where you’ve backed a generationally defining company, timing the exit to maximize the outcome is one of the biggest challenges to solve. There are many examples of VCs selling early, and missing a lot of upside - some selling after an IPO, and some selling to generate DPI (distributed to paid-in capital) to investors, more often than not, because they need to raise their next fund. In other instances, VCs may choose to launch continuation funds to hold onto the continued upside in the business. It’s hard to determine when to exit, and fear can often misguide you where you’re afraid of losing the upside you’ve made with the investment (an extreme example is how Benchmark fired Travis Kalanik because they were concerned about the risks on the company, and therefore the potential upside that they could lose in the process).
We are still early in MENA, and have only started showing signs of value creation, impact and transformative companies being built. I’ve been around for enough time in the ecosystem to see things playing out; new cycles of companies being started up in the ecosystem, growth in talent and founder quality, growth in scale, outcomes and ambitions. It’s never been more exciting. The first fund that I launched at BECO with Dany Farha was in 2014, where we had made warehoused investments from 2012 to 2014 into the fund, and then added a bunch of new investments from 2015 to 2018. That fund has backed some truly remarkable founders and companies, and is on track to generate a solid performance when it comes to DPI, driven by the power law of venture capital where so far, 2 outcomes created most of the value, Careem and Property Finder. Both companies couldn’t be more different from each other, and yet both generated significant returns to BECO on exit. I can only speak from experience here, and having left BECO in 2020, I wasn’t involved in the exit decisions that took place after that, specifically with Property Finder. Dany and I waited for almost 12 years to generate carried interest on this fund, and recently I reflected on the concept of exiting a portfolio and how to ensure that you maximize the potential upside as an investor.
In venture investing, it’s in those final years that you can truly compound your returns, and so being conscious of that and having the courage to take the risk, can truly define your fund’s returns to LPs. Both Careem and Property Finder provide very relevant examples of companies that are venture backed and have varying potential outcomes, where the decision to exit is very different. I’ll try and break my thoughts down as simply as I can below to give you an idea of the perspective I’m taking (one could take many different view points here, and there are many “answers” to this question).
Careem’s journey was one that relied on fundraising and execution, amongst other things. The founding team assembled what was a truly unique and inspiring culture that attracted some of the best talent from all over the world. It was the first company in the region to do this at scale. Their mission and purpose was clear and their execution both on talent, growth and fundraising were incredible. They had to compete with Uber, the big hairy Gorilla, with deep pockets that allowed them to subsidize growth. Careem had to play the same game, and so fundraising was something that determined whether they succeeded or failed. Their unit economics were challenged and they were never close to profitable. They did this in a ZIRP (Zero Interest Rate Policy) environment, which allowed them to have greater access to capital, and they timed their exit to perfection (right before COVID). If they didn’t, the story could have taken a turn for the worse. They wouldn’t have had any alternatives and would have, most likely, required a fire sale type of exit. It was either continue raising funds and competing, or the capital dries up and the company struggles to maximize value. Exit optionality for an investor was limited. We had to go all the way to an acquisition. And as the business scaled and grew in value, the number of acquirers shrunk. Who knows, maybe if Travis was still in charge of Uber, then an acquisition may not have happened. So basically, a sequence of events had to occur for the opportunity to manifest at the time it did, and for the transaction to get completed (it needed the approval of regulators across markets). None of this would have been possible without Mudassir, Magnus and Abdullah, and their leadership team (Ankur, their CFO and many others including some investors). We returned back the fund ($50m+) with this exit, and now we were in carry territory as GPs. Returning back the fund relieved some of the pressure as LPs got back their initial investment, and the fund still has several other drivers in the portfolio.
In comes Property Finder. This company is quite possibly the “golden goose” of Internet business models. Classifieds is a cash cow. The true essence of network effects whereby the more listings you have on the website, the more users visit, which in turn drives more listings, and so on. Classifieds is broken down into horizontal players like Dubizzle and Harraj, and vertical classifieds for jobs (Bayt and LinkedIn), cars (Syarah) and real estate (Property Finder). It’s one of the hardest models to displace and many people have tried to do that across many different markets and verticals, e.g. Craig’s List and Harraj are great examples of mediocre products combined with network effects that truly make them defensible.
Property Finder is hugely profitable today, and the company only raised 3 rounds of funding to get there. Dany and I met Michael back in 2012, through a referral from one of Dany’s friends, Patrick Jarjour, who ran his own real estate agency at the time and loved the product. We loved Michael from the moment we met him. His business was already profitable back then, and we were lucky enough to get the chance to lead his Seed round where we put in $1.5m at a $17m valuation (at the time we were scared that we were overpaying, and our projections had showed that the company could reach $27m in revenue in 2018 as a best case). Fast forward to today, Michael has crushed it and is far bigger than we ever thought possible in 2012. The company is now doing north of $150m+ in revenue and is massively profitable. He raised 2 more rounds, getting investors like Vostok New Ventures and General Atlantic in the process. In 2024, BECO was reaching the 10 year mark of its first fund's life, so exiting now became a priority. As is the case with most VCs, the fund has two, one-year extensions to ensure that they give themselves enough time to exit the portfolio. So that means BECO had until 2027 to sell. The fact that the company is profitable means they don’t need to raise any more capital, outside of doing an IPO to provide liquidity to shareholders, and there would be no dilution to existing shareholders along the way. Michael is likely to go for a public listing over the next 2 years, and the fund had a major markup in its position. Exiting was a priority, and generating DPI to LPs is necessary. Facilitating an exit is always a challenge, and Dany and the team worked hard toward creating that opportunity with Property Finder. The company ended up buying BECO's shares at a $1bn valuation using debt (which they were able to do since the company was very profitable). A great return for BECO where they generated over $80m (1.6x the fund) to LPs, and we, the GPs, made carried interest.
Here’s the catch though, the company is growing at 20% to 30% per year, profitable and on track for an IPO. In addition, the company bought back the shares at $1bn, likely a discount to the actual value of the business. For every additional $1bn in value, BECO would generate another 1.6x in DPI. Going from $0 to $1bn is much harder than $1bn to $2bn. Herein lies the decision venture managers, at least the lucky ones who have a great company in their portfolio, struggle with. On the one hand, selling now generates liquidity and potentially boosts IRR numbers. And on the other hand, it potentially leaves an additional $80m+ on the table. The chances that Property Finder could do a successful IPO and reach $3bn in value over the next 2 to 3 years is very possible, and that could mean an additional $160m in returns. In other words, it took BECO 10 years to generate $80m, and it could potentially take them another 3 years to generate $160m - and that's the power of compounding. In hindsight, the most prudent outcome could be a partial sale and hold for greater upside. Investors get liquidity and the fund continues holding what could be a further uplift in returns. We are in the business of taking risks, and finding another Property Finder is really really hard, if not near impossible (as the term unicorns alludes to).
As most of the VCs in the region start reaching maturity in their fund life, they will be faced with similar decisions in the portfolio. The nuance here is that this is always context specific and dependent on the quality of companies in the stable. Having hard rules can limit your upside. Continuation funds exist for this purpose. And yet, it would be hard and also naive to put all your eggs in the end - but for those great companies, selling down is possible and could be a great option to use when facing this situation. We have several companies in the region that exhibit similar characteristics to Property Finder - companies like Salla, Tabby, Hala Payments and Huspy to name a few - close to profitable (if not profitable), growing fast with deep markets, low risk of collapse and no real capital constraints (i.e. not needing to raise in order grow). These companies will always have the ability to generate liquidity. As investors, we wait for these moments for years (again, a fund life is at least 10 years), and so timing this moment is critical.
I’ll leave you with this. Founder’s Fund 2007 vintage is still running after 18 years. Ask yourself why that could be? It’s because of SpaceX. A rare, n of 1, world-defining company that everyone wants to invest in but can’t. Founders Fund invested $20m in 2008. For every turn of $100bn in enterprise value, I would imagine it contributes massively to the overall returns of the fund, and I’m sure LPs would be happy to hold on just for that exposure. I’m not equating SpaceX with the companies I mentioned earlier, but I am suggesting that some of our companies have really defensible positions, profitable business models, and a large market. Venture investors long for the day where they can find and back those once-in-a-lifetime founders that can truly generate enormous value, wealth and impact in the process. If we’re lucky to have any of those in our portfolio, then we have to be thoughtful and courageous when assessing when to exit to ensure we capture the most amount of upside we can. We are driven by the power law, and it’s in those rare outliers, where all the returns are made.
I hope this sparks debate amongst VCs and LPs on the subject of exits down the line.
This article was first published here and has been republished on FWDstart with the permission of Amir Farha.
