Crowd investors pay attention: SwiftKey’s exit

Backers of digital smart keyboard company SwiftKey are getting the exit all early-stage investors dream of as Microsoft announces the purchase of the company for a cool $250,000,000. Yes, that’s right, two-hundred-and-fifty-million dollars.

News articles have been pouring out, talking about how wonderful of an exit it is for another London-based tech company (DeepMind having been another major recent London-based exit) and speculating that surely there will be many more to come. The entrepreneurs are walking away with around £25 million each, which means that around £120 million (we’ve switched to Great British Pounds now) will have been shared amongst the earliest investors, Index Ventures and Octopus (who invested in the Series B round), and a few key early employees. Quick, run to your nearest angel group or online platform and start searching for the next SwiftKey! — said the fool.

Let’s look at the facts
Before succumbing to delusions of grandeur, let’s take a step back and look at what it actually took for SwiftKey to exit and just how rare this type of exit actually is.

First, let’s consider the period of time it took for SwiftKey to get to this exit: eight years. It took eight years, multiple angel rounds, a series A, and a chunky series B, for SwiftKey to get the size required to achieve the sort of exit that is life changing for early investors. Facebook took eight years to go from launch to floating on the market in 2012. Google only took six years, having launched in 1998 and floated in 2004, but the market was incredibly different back then. Whenever I read an entrepreneur’s pitch deck and I see their exit strategy is, say, three to five years, I chuckle a little inside and wonder how realistic the entrepreneur is being about other aspects of their business. While an exit in three to five years is not impossible, and actually plausible if the company has been going for a few years, it is not the norm and investors should immediately expect it to take at least twice as long.

It took eight years, multiple angel rounds, a series A, and a chunky series B, for SwiftKey to get the size required to achieve the sort of exit that is life changing for early investors.
Secondly, let’s use a simplified example to show how hard it is to find a SwiftKey type of investment. Let’s assume that SwiftKey came in a batch of 100 companies that all started in 2008. The common notion is that of those 100, about 50 will fail completely in the first three years. Let’s be generous and say another 20 of them will end up as lifestyle businesses that don’t really return anything to the early-stage investors. Ten may return the investors’ money, making them 1x-ers; ten of them will do a little more than 1x; and the last ten will do well enough to just about cover the cost of funding the other 90 businesses. Oh, and if you’re lucky, every couple of batches of 100 may result in one SwiftKey-style exit.

Rose-tinted investments
Unfortunately, we’re all prone to the cognitive bias illusory superiority, whereby we overestimate our own qualities and abilities in comparison to others. We see an exit like SwiftKey and believe that we have the power to do even better. But we must come to terms with SwiftKey being the massive exception. There were 330,000 new companies formed in the UK in 2014. Finding a SwiftKey is probably as likely as winning the lottery (don’t check the stats, I’m going on gut feel), and we must understand that angel investing is not always about the 100x return.

Have a listen to Peter Cowley, UKBAA Business Angel of the Year 2014, as he talks about his strategy which is not always going after the companies in the billion-pound markets — you can stream the podcast here or download straight to iTunes.

Then have a listen to Elizabeth Kraus as she expertly details all of the decision-making steps she painstakingly goes through before making an investment decision — stream here or download to iTunes.

Share your thoughts in the comments; I’d love to start a discussion on the topic of angel investing myths. Until next time…

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