Startup Exit Strategy Thought Piece V7.6
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The document outlines the importance of having an exit strategy for startups to maximize value and minimize risks. It suggests entrepreneurs should consider early exits, especially in favorable market conditions, and emphasizes the need for a well-structured process in preparing for acquisition or sale. Additionally, it highlights the changing dynamics in the startup funding landscape and the value that experienced advisors bring to the exit process.
Startup Exit Strategy Thought Piece V7.6
- 1. EXIT STRATEGY FOR STARTUPS VentureArchetypes, LLC Startup Advisory + Deal Support
- 2. CHAPTER I: CONTEXT aka, “why this matters to you”
- 3. WHY THINK ABOUT YOUR EXIT? ...because a solid exit process maximizes value. • The Exit Is Just As Important As The Investment – How is value created? By forming a business, building the business, and selling the business – A well-designed Exit can create as much economic value (for founders, investors, and employees) as all the heavy lifting of actually building the business • The Startup Landscape Has Changed – Open source, viral media, cloud, EC2, APIs, offshoring, etc. = cheap to start & scale a company – Lean startup model = rapid prototype & testing, multiple pivots (instead of one big business model bet) – Goal mis-alignment between VCs & startups = Angels and super angels are the new funding sources • The Exit Environment Has Changed – IPO market is still (pretty much) dead – For large companies, “M&A is the New R&D” – Large companies have too much cash & need to buy a growth story – Business strategies of acquirers are intersecting (Google vs. Apple vs. Adobe etc.) Net-Net: Cheap & lean startups + smaller funding rounds + new funding sources + faster startup lifecycles + shorter time to (fail or) exit = The New Opportunity.
- 4. WHY IT MAKES SENSE TO EXIT EARLY Lower risk, more return (for Entrepreneurs) • Entrepreneurs like to create and grow, not manage – Start it, build it, sell it-- and then start again (or become an angel investor) – Founders’ value typically diminishes over time, as co. requires more process, less experimentation – Your key strengths are in creating-- not managing the people, systems and structure of a large enterprise • The VC model breeds big, “swing for the fences” companies – Large VC funds require massive exits to move the needle – VCs have multiple mechanisms to block exits that would otherwise be good for Founders • Mis-alignment of goals and time horizons – Venture-backed companies average 6-8 years from VC financing to M&A exit – After founders’ shares have already vested, “equity effect” becomes a drag on momentum, motivation – Relatively few founders are still at the helm at the time of an IPO or mega-acquisition Question: Are you working for your benefit, or your VC’s?
- 5. LEAN STARTUPS + EARLY EXITS A match made in Heaven + = Lean Early Two Great Tastes that Startups Exits Taste Great Together Interesting fact: Small, quick exits can be bigger “wins” for Founders than exits from VC-backed startups.
- 6. CHAPTER II: TIMING aka, “why this matters to you, right now”
- 7. A FORK IN THE ROAD Are you an Entrepreneur or an Empire Builder? Exit @ $25M IPO or Acq. Prove w/65% Equity @ $150M Raise Business w/15% Equity Angel Model Start Achieve Social Proof: Raise Raise Raise Co. Product / Traction, Series A, Series B, Mezz, Market Fit Momentum own 40% own 25% own 15% 2 - 3 Years 6 - 8 Years Risk Level (Probability of Failure) Short Version: Reducing Time to Exit = Reducing Risk + Enhancing IRR
- 8. WHEN TO START THINKING EXIT? ...much sooner than you think. • From The Entrepreneur’s Perspective: – When the market is frothy (aka “get while the gettin’s good”-- e.g. AdMob, Playdom) – When there are clouds on the horizon (sell before it storms-- e.g. Flip Video Camera) – When big firms are hurting-- i.e. they missed the boat, and need you bad (e.g. Mint.com) – Before raising another round (the more VC rounds you take, the more ‘unnatural acts’ you need to perform to deliver an acceptable ROI) • From The Acquirer’s Perspective: – When there is a strong management team (particularly product & engineering) – When there is a “big idea” or “new, new thing” that will excite shareholders – When the business model has been at least partially “proven” (ARPU > CPU) – Before valuations get too high (thus requiring Board approval) Perfect Storm: Big Idea + Momentum + Distribution + Capital = Win / Win (startup) (startup) (large co.) (large co.) (both)
- 9. IDEAL TIME TO START EXIT PLANNING ...is when you have: The best time to sell is when the business model is proven, growth is on an upwardly- Momentum sloping trend, and acquirers Thought Leadership in New Space Magnetism- $$, Employees, Press desperately need you. “Aura” of Something New Proof Need Traction (MAU, PVs, Time, Retention) By Users Positive Growth Metrics By Partners Bus. Model (ARPU > CPA) By Large Co.’s Net-Net: This perfect storm is often achieved in as little as two years.
- 10. SMALL EXITS ARE THE NORM, ACTUALLY Though mega-acquisitions get the press attention Target Acquirer Amount (est.) Serious Business Zynga $30M Scout Labs Lithium $25M Adscape Google $23M Blogger Google $20M Oddpost Yahoo $20M Picasa Google $5M LiveJournal Ask.com $25M Flickr Yahoo $30M del.icio.us Yahoo $30M Weblogs AOL $25M Kaboose Disney Online $18M Summize Twitter $15M SocialThing AOL $10M FoxyTunes Yahoo $40M Aardvark Google $50M Net-Net: In most cases, even a $10M exit has a “life-changing” impact on founders
- 11. CHAPTER III: GETTING TO EXIT aka, “selling startups for fun and profit”
- 12. WHAT IS EXIT STRATEGY? ...a vision, a process, a philosophy...and more. • Strategy – Anticipating Large Co. needs + skating to where the puck will be (e.g. AdMob,YouTube) – Picking the right targets to dialogue with (the art of “wrapping yourself around a potential acquirer’s axle”) • Positioning – Telling a good story + Illuminating Strategic Value / Fit – Selling the future potential and other intangibles-- “what could be” • Negotiation – Nuances of the dialogue-- e.g., hard vs. soft-sell, determining where the acquirer is flexible, etc. – Framing deal terms & options in a mutually beneficial manner – Closing the deal efficiently and effectively Process: Strategy ➙ Selection ➙ Positioning ➙ Pitch ➙ Negotiation ➙ Execution
- 13. DOING THE DEAL Key success factors for getting what you want • Exiting is a Process – Most of the time, companies are sold, not bought – Optimum exits require an active sales process • Time Is (Generally) Not Your Friend – Deals can unravel if they drag on too long (cold feet phenomena) – Every step should have a deadline (real or created) • Friction Is The Enemy – Establish trust early (but verify) + open communication flows – Clean the house before visitors arrive (IP ownership, cap table, audits, term sheet issues, investors’ expectations) – Goldilocks Strategy for bringing in attorneys-- not too early, but not too late Heat Formula: Acquirer need/desire X # of bidders at the table = Speed & Terms of the Deal (price, cash/stock, earnouts, etc.)
- 14. DOING THE DEAL PT. II More tips and best practices • Start Thinking & Planning Exit Strategy Early – Most entrepreneurs wait too long; instead make the “end game” part of your overall operating strategy • Don’t Get Greedy – Holding out for “all” increases the risk of getting “none” (aka pigs get fat, hogs get slaughtered) • Pay Attention to Investor / Entrepreneur Alignment – Get written sign-off on your Exit Strategy • Negotiate Tough, But Fair – A “friendly acquisition” is a good thing (you may be working for the acquirer when the dust settles) • Get Help – Someone who thinks about this stuff 365 days/year – Someone who can help you put forth cogent valuation arguments – Someone who can bring an impartial lens (the CEO is often too close to the deal) In A Nutshell: Strategy + Process + Help + Heat = A Successful Exit
- 15. CHAPTER IV: VA EXIT TEAM aka, “who the hell are you guys, and what can you do for me?”
- 16. WHAT WE DO Exit Strategy and Startup Acquisition Advisory • Deal Strategy – Setting Exit Strategy within the context of operating, finance, and growth goals – Figuring out: Who? When? How? Why? (and 1,256 other little details) • Positioning & Pitch – Honing your message + illuminating strategic value (aka “making them want you”) • Packaging and Valuation – Offering Memorandum, Exec Sum, Pitch Book, Finance Models,Valuation Analysis, etc. -- the whole nine yards • Process Management – Research target acquirers; Create and filter target buyer list; Initial introductions – Facilitate meetings + Generate Momentum + Manage Communications • Execution – Getting “heat on a deal” (aka, creating an auction environment with multiple bidders) – Act as bad cop when needed (esp. if you will be working for the acquirer post-deal) – Negotiation, due diligence management, closing. Helping you pick out your Bentley. Short Version: Reducing Management Burden + Increasing Deal Value
- 17. VALUE ADD Keys to a successful engagement Selecting a dedicated partner 2 and teammate is key: Develop – Formulates a cogent strategy an appropriate designed to maximize value 1 exit strategy Position the company optimally – Introduces a process-driven 3 approach to ensure the deal runs Leverage smoothly management time & resources and help close – Reduces the burden on company Research and management (so you can focus on source “right” keeping the business growing) partners or Actively manage acquirers 6 – Increases credibility and “levels the the entire process playing field” with acquirers & get heat on Assist with the deal 4 generating warm – Generates momentum and “heat” introductions on a deal 5
- 18. EXIT STRATEGY AS PROCESS Engagement mechanics & value delivered The Process In A Nutshell: By doing this: ✓ Develop a plan • Illuminate strategic value in Pitch ✓ Confirm alignment (founders, • Provide support for deal terms & valuation investors, Board) • Expand the network of potential acquirers ✓ Build exit team • Plan and coordinate process + scheduling ✓ Clean up corp. structure • Run outreach in parallel, not serial manner ✓ Prep for due diligence We deliver this: ✓ Prepare deal / pitch materials ✓ Build the Target list • Protect CEO ✓ Initial Target screening • Offload management burden ✓ Management meetings • Reduce the time to close ✓ Manage the auction • Improve odds of success ✓ Negotiate and close • Maximize price and terms Net-Net: A well-designed process significantly increases the probability of success.
- 19. ABOUT US ...we really, really like tech startups. Nathan Beckord, MBA CFA! Greg Robin! Nathan has been advising startups on strategy, finance, business Greg started his career as a technology, investment development and venture / exit issues for over ten years. He banker at Hambrecht & Quist. As a versatile software has worked with more than 100 companies across a broad industry veteran, he has over fifteen years of experience range of industries-- from software, SaaS, and social media, to working with both enterprise and consumer-focused mobile, entertainment, and consumer products. ! companies. ! He has also served in interim Corporate / Business Greg has also held various business development, partner Development and CFO roles, and helped several firms develop management and product development roles at the key strategic partnerships with F500 firms. Nathan is currently following firms: Excite@Home, Gap Online, Macromedia, on the Advisory Board of four startups and has been co- founder in two technology firms. ! Niku, Pacific Bell and Wells Fargo.! Previously, he worked in investment banking for JP Morgan, Additionally, Greg has provided partnership advice and Access Ventures, and Piper Jaffrey. He has been involved in counsel to numerous web-based software and online three technology IPOs and nearly 40 acquisitions, in addition to ventures focused on delivering services and solutions over numerous private investments and joint ventures. ! the web.! Nathan has a BSC from Santa Clara University and an MBA Greg graduated from the Wharton School at the from the University of Texas at Austin. He is also a Chartered University of Pennsylvania, with a BS in Economics and a Financial Analyst (CFA).! concentration in Decision Sciences.! Short Version: We Speak Startup + We Speak Deal
- 20. OUR BUSINESS MODEL It’s pretty simple, actually. • Our business model: work fees (retainer) + success fees (paid upon deal close). • Three flavors of service: • Exit Coach: Provide on-demand advice, strategy and coaching as you progress down the path with potential aquirers. Act as sounding board to help think through critical issues, tee up discussions, overcome objections, frame the pitch and get “heat” on a deal. Help support your Exit Team. • Advisor: Includes the coaching services described above, but also involves a more hand-on development role where we help create the pitch materials, refine target lists, and provide modeling and valuation support; also periodically includes a more forward-facing role when needed (e.g. participate in meetings). • Deal Lead: A fully-engaged role where we work closely with management from beginning to end. Includes the above, plus active target sourcing and outreach, communications management, due diligence process support, negotiation and closing assistance. Pitch & Outreach & Deal Strategy Valuation Negotiation Coach ✓ Advisor ✓ ✓ Deal Lead ✓ ✓ ✓
- 21. GIVE US A CALL Let’s talk about your Exit. Nathan Beckord, CFA Principal nathan@venturearchetypes.com 415-370-5060 Gregory Robin Principal greg@venturearchetypes.com 415-425-5374 VentureArchetypes Deal Accelerator http://www.venturearchetypes.com/Deal-Accelerator.html twitter: @startupventures We look forward to working with you.
- 22. CLOSING COMMENTS Let’s talk about your Exit. “ Today, the optimum financial strategy for most technology entrepreneurs is to raise money from angels and plan an early exit to a large company in just a few years for under $30 million. -Basil Peters ” (Basil is author of the book Early Exits and we consider him one of the definitive thought leaders on the topic. A significant portion of this deck was directly influenced or inspired by Basil’s work. You can learn more about him by going to BasilPeters.com or AngelBlog.net. ) We look forward to working with you.