Exit Time - How Startup Participations Generate Profits

Investments in startups generally offer very low fixed interest rates. At Companisto, the investors’ participation loans in the young companies’ economic successes bear only one percent interest annually. The true profit is made when the startup achieves a so-called “exit.” This can be a sale of the company, a takeover by competitors or corporations, or an initial public offering (IPO).

Maturity loans ensure that the investments continue to exist for as long as the company exists. The investors participate in the startup’s profits as long as the founders or other shareholders do not make a buyback offer or achieve an exit.

This means that equity crowdfunding investments in startups and growth companies are long-term investments. It takes an average of 5-8 years for entrepreneurial companies to generate profits, be sold, or taken over. Other companies continue to exist after ten years and generate profits for their investors without an exit through annual dividend distributions.

Returns from investments in startups: Exit possibilities

Depending on how a company develops, a variety of exit opportunities come into question. Startups have often already developed a strategy for the most likely exit by the time of an equity crowdfunding round.

Exit through acquisition by competitors

In this scenario, another company in the same industry takes over the startup. This is very common in the startup scene because several founders have similar or the same ideas, and thus the company with the most venture capital runs the race.

For example, there were several takeovers among German food delivery services: The delivery services Foodora, Foodpanda, and Foodfly were acquired by Delivery Hero, whose competitor Lieferando acquired Food-Express, Eat-Star, and Resto-In. The Companisto startup doxter was acquired by its Luxembourg-based competitor doctena; both organized online booking of doctors’ appointments.

Exit through acquisition by corporations / strategic partners

Large companies like Audi, VW, Axel Springer, Rewe, the Deutsche Bahn, and Dr. Oetker have to deal with new ideas and business models in their industry in light of digitalization. Corporations are closely observing startups whose new business approaches are transforming entire industries. More and more companies invest in acquiring young companies in order to expand their competencies and not fall behind. For the entrepreneurial companies, on the other hand, established companies can be important strategic partners whose market experience can support the startup’s developments.

For example, Rewe acquired ZooRoyal, Lidl took over Kochzauber, Siemens bought up Tass, a Dutch crash simulation startup, and VW acquired PayByPhone, a Canadian startup.

Exit through sale to holding companies / strategic investors

A number of corporations, such as Apple, Google, Gruner+Jahr, Ströer, and SAP, have their own holding companies through which they purchase companies and thus integrate new business areas and products into their own portfolio. For example, Apple purchased the German eye-tracking startup Sensomotoric Instruments in July 2017 and the Munich-based startup Metaio in 2015; Ströer acquired the Companisto startup Foodist in 2015; and Google purchased the bargain startup DailyDeal in 2011.

Startup IPO

Another opportunity for young companies is making an initial public offering on the stock exchange. The company transitions into a limited company whose shares can be traded on the market. By offering company shares, the former startup generates new capital, which the crowd investor participates in.

IPOs are not ideal exit opportunities for all enterprises. They require lengthy and extensive preparation. Nonetheless, there are several German startups that have chosen this route. These include Zalando, Delivery Hero, B.R.A.I.N. AG, Trivago, and Windeln.de.

Exit through buyback offer by founders or shareholders

Some founders buy back shares of their company when they have overcome their need for capital or want to take the next step as sole owners. In this case, the crowd investors decide whether or not to accept the offer by majority vote.

At Companisto, the five founders of 5 Cups and some sugar offered their investors to buy back their shares in 2015, one year after the financing round. Investors accepted the offer for 45% return. The buyback offers were also accepted for the crowd-financed startups erdbär and LeaseRad. Yields were 300% and 500%, respectively.

Return on investments in startups, other than exits

Next to exit participations, investments in entrepreneurial companies can also generate smaller returns. The crowd investor participates in the profits of the company in a similar way as with a publically traded company.

Dividends and interest income

Investors can make profits even if a company is neither sold, acquired, has its shares bought back, nor enters the stock market. The profits are on a lifetime basis.

When the startup generates profits, the corresponding participation is paid out annually. Jamie Jacobs, SongFor, and ePortrait are some of the startups in Companisto’s portfolio that are already distributing dividends to their investors. These dividends are calculated in proportion to the invested sum. The fixed interest rate, on the other hand, is not earnings-related.

In conclusion, crowd investors have three ways to make returns from their investments in young companies: an annual fixed interest rate of 1%, profit participation, and a participation in an exit.

Investments in growth companies

The so-called venture and impact loans are investment opportunities in established growth companies (venture loans) and in companies with a business model that includes environmental or social benefit (impact loans). The investor receives a fixed interest rate of 8% per year, which are distributed semi-annually.

These contracts run for six to eight years. The investor thus benefits primarily from the annual interest.

If you are interested in investing in a startup, you can sign up on Companisto for free.