The dream of a startup founder can typically be summarized by the next, well-intentioned, and principally delusional quote, “We’ll raise a few rounds and in a few years we’ll IPO on Nasdaq.”
However a extra possible state of affairs seems one thing like this.:
You make investments a couple of years of onerous work to construct one thing of worth. In the future you obtain an acquisition supply out of the blue. You’re elated. And also you’re not ready. You drop all the things to give attention to this chance. Unique due diligence begins. Your organization is a multitude (IP, contracts, burn). Days grow to be weeks; weeks grow to be months. You’ve uncared for enterprise and fundraising. You’re operating out of cash. M&A is now your one and solely choice. The customer says they discovered a bunch of cockroaches within the partitions and drops the worth. Now what?
That is nonetheless a positive state of affairs: you had a suggestion! Assume about how a lot time you invested in your numerous funding rounds. The tons of of names and Google spreadsheet or Streak-powered quasi-CRM course of.
Have you ever spent even a fraction of that on understanding exit paths? For those who’d slightly not reside the state of affairs described above, learn alongside.
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The E-word: A Unusual Taboo
Buyers reside by exits, however many founders hold dreaming of unicornization and keep away from the “E-word” till it’s too late. But, in 2016, 97% of exits have been M&As. And most occurred earlier than collection B.
Exits matter as a result of that’s if you, your workforce and your buyers receives a commission. Oddly sufficient, and to make use of a chess metaphor, we hear lots about the “opening game” (lean startup), the “mid-game” (progress) however little or no about this “end game”.
Consequently, founders miss alternatives or depart cash on the desk. This can be a disgrace. Our fund, SOSV, has over 700 corporations in portfolio. We would like the absolute best exit for every of them. And fortune favors the ready! Now, learn how to get 700 exits (and counting)?
To discover the subject, organized a collection of Masterclasses tapping company consumers, bankers, buyers, legal professionals, and startup CEOs with M&A or IPO expertise in San Francisco. It was a gaggle that included the founders of Guitar Hero — purchased by Activision; JUMP Bikes — a SOSV portfolio firm purchased by Uber, Ubiquisys — purchased by Cisco, and Withings — purchased by Nokia. Every one for lots of of hundreds of thousands).
Their observations might be summarized under.
“Founders must be aware of what contributes to an exit. This means understanding partnerships and how they are formed in the business space the entrepreneur is working in,” stated one MasterClass participant.
As founders, you construct your product, your organization and… optionality. You have to perceive the choices open to your organization, and take steps to allow them.
The most certainly one is an acquisition however there are others like IPO (together with small cap), RTO, SBO, LBO, Fairness Crowdfunding and even ICO.
“Exit is not a goal per se, but as a CEO it is something you should think about as early in your cycle as possible, while being business-focused,” stated the London-based investor Frederic Rombaut, of Seraphim Capital.
Certainly, most individuals stated that exits should all the time be on the chief government’s agenda, regardless of how early within the course of. “Exits should be on the CEO agenda. Not front and center, but on the agenda. M&A is a by-product of a great business and targeted BD. IPOs are always an option once you’ve built significant cashflow forecasting.”
It’s necessary to ask questions like: What number of “strategic engagements” with potential consumers have you ever had this month? Is your message and worth clear of their eyes? Have you ever thought-about an acquisition monitor in parallel to a fundraise?
It doesn’t cease there:
- Fairness crowdfunding may assist shut some gaps at seed stage.
- Early IPOs on smaller exchanges could be an choice to boost over $10M — the robotics startup Balyo went public and raised 40MEUR on Euronext to eliminate a important ‘right of first refusal’ choice held by one in every of its company buyers.
- Reverse mergers can work too: the medical exoskeleton firm EKSO Bionics went public this manner.
One factor is certain: the time to exit isn’t whenever you’re operating out of cash.
Corporations are purchased, not bought
Unicorn or not, the probably exit is an acquisition.
As George Patterson, Managing Director at HSBC in New York stated, “Good tech companies are bought, not sold. The question is thus: how to get bought?”
Patterson says it’s essential to know how mergers and acquisitions truly work; the right way to put together a startup for an exit; and the best way to develop a “feel” for the market you’re exiting via and into. ;
How M&A works
Listening to from corp dev veterans from Cisco, Logitech, Dassault and IBM, a couple of key concepts emerged:
It could possibly be (from least to costliest, or as a mixture), as listed by Mark Suster, Managing Associate at Upfront Ventures:
- Expertise rent ($1M/dev as a rule of thumb — location issues)
- Product hole
- Income driver
- Strategic menace (keep away from or delay disruption)
- Defensive transfer (can’t afford a competitor to personal it)
Corporates discover offers by way of the event of partnerships, funding (CVC), their enterprise models, corp dev analysis, media, and investor connections.
Requested about the perfect strategy, Todd Neville, Supervisor of Company Enterprise Improvement and Technique at IBM (who gave probably the most detailed description of the corp dev course of), stated, “Do something cool to one of the IBM customers. If they rave about even a POC, we’re interested.”
In different phrases, enterprise improvement is company improvement.
Get the home so as
Consumers sometimes need to know three issues:
- Is your IP actually yours?
- Is your staff succesful?
- Will your clients stick round?
For IP, they’ll verify your contracts (employees and contractors), run some automated code evaluation for proprietary code and open supply use. They may consider potential IP infringement. No level shopping for you if you find yourself costing extra in lawsuits!
On your staff expertise: sitting down together with your engineers will inform them a lot sufficient with out understanding the small print of this or that algorithm. Make sure the very last thing a company needs is to be accused of stealing!
Legal professionals engaged early might help. The later the clean-up, the extra pricey and painful.
Develop a really feel in your “market”
Develop relationships and create champions inside corporates. It should assist promote your deal when the time comes, and can allow you to hold your finger on the heart beat of company technique to time your strikes.
Do you learn the incomes calls of Cisco or IBM (or others related to you)? That is the place methods are introduced. Are your key phrases arising there or of their press releases?
Chris Gilbert, former CEO of Ubiquisys (bought to Cisco for over $300M) was very deliberate in planning his exit.
“Selling start on day one and is a leadership-only function — work out who will be your buyer. Only the CEO can do this. Constantly articulate why a company should buy you,” Gilbert stated. Deliver clear messages into the buying firm so it may be introduced upwards: give them the presentation you want to them to point out their boss! When the time is true, drive selections by means of competitors. In case you know they’ve to purchase you, your beginning place is robust.”
The Darkish Artwork of Worth Discovery
There are dozens of formulation (from DCF to comparables) to guage a deal — which additionally means none is ‘correct’. What issues is: how a lot would you promote for, and the way a lot is the customer able to pay?
Gilbert, at Ubiquisys, described how shut interactions together with his banker helped drive the worth up among the many bidders assembled.
Identical to consumers, we meet bankers and legal professionals too not often at startup occasions, however there’s a lot to study with them. They make offers occur, keep away from worth erosion and optimize worth. They typically additionally make introductions earlier than you interact them, to construct goodwill and earn your enterprise.
And should you fear about charges, the best banker handsomely pays for itself by discovering extra bidders, and enjoying “bad cop” for you, avoiding direct confrontation together with your future employer. Would you like a slice of the watermelon or the entire grape?
Ultimate Twist: Exits Are Not Exits
When requested about what occurs after an M&A or IPO, consumers stated that they typically hoped the founders would stick with them for a few years. Typically utilizing re-vesting, earn-outs or shares of the buying firm to incentivize them. Neville, from IBM, talked about a safety firm they acquired whose founder is now the top of one of many largest IBM divisions.
Within the case of IPOs, supposedly the last word “exit”, any block of shares bought by founders would face excessive scrutiny and may trigger a worth drop.
So who’s exiting throughout these offers? Buyers (and never all the time).
Ultimately, if the typical age of a startup at exit is eight–10 years, the lively obligation interval of founders (if not changed within the meantime) extends much more. Higher love the issue you’re fixing, and your clients!
Because of audio system, individuals and supporters of this Masterclass collection:
London: Frederic Rombaut (Seraphim Capital), Joe Tabberer (FirstBank), Chris Gilbert (Ubiquisys), Jonathan Keeling (Crowdcube), Fred Destin, Tony Fish (AMF Ventures, James Clark (London Inventory Change), Denise Regulation (SGCIB).
Paris: Frederic Rombaut (Seraphim Capital), Manuel Gruson (Dassault Systemes), Pierre-Henri Chappaz (Rothschild International Advisory), Christine Lambert-Goue (All Make investments), Olivier Younes (EXPEN), Eric Carreel (Withings), Fabien Bardinet (Balyo), Xavier Lazarus (Elaia Companions), Pierre-Eric Leibovici(Daphni). Jean de La Rochebrochard (Kima Ventures), Jeremy Sartre (SmartAngels), Gwen Regina Tan (Entrepreneur First).
San Francisco: Natasha Ligai (Logitech), Matt Cutler (Cisco),Will Hawthorne, (CODE Advisors), Ryan Rzepecki (JUMP Bikes), Charles Huang (Guitar Hero), Jeff Thomas (Nasdaq), Shahin Farshchi (Lux Capital), Ammar Hanafi (Second Ventures), Adam J. Epstein (Third Creek Advisors), Nathan Harding (EKSO Bionics), Kate Whitcomb, Anthony Marino and Ethan Haigh (SOSV).
New York: Todd Neville (IBM), George Patterson (HSBC), Ryan Rzepecki (JUMP Bikes), Aaron Kellner (SeedInvest), Jeremy Levine (Bessemer Enterprise Companions), Taylor Greene (Collaborative Fund), Adam Rothenberg (BoxGroup), Eli Curi(Fenwick & West), Ian Engstrand and Salil Gandhi (Goodwin), Warren Spar(Sparring Companions Capital), Duncan Turner, Vivian Regulation and Sheng Ge (SOSV).