Exit Strategies for Startups - Hadi Partovi


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Exit Strategies for Startups - Hadi Partovi

  1. 1. Exit Strategies Hadi Partovi StartupDay 2010
  2. 2. Possible exits <ul><li>Not many unique outcomes: </li></ul><ul><ul><li>Acquisition </li></ul></ul><ul><ul><li>IPO </li></ul></ul><ul><ul><li>Stay private forever (pay dividends, no exit) </li></ul></ul><ul><ul><li>Failure </li></ul></ul><ul><li>For the vast majority of startups, this boils down to acquisition or failure </li></ul><ul><li>Ergo, “exit strategy” = “how to get acquired” </li></ul>
  3. 3. On failure <ul><li>The paradox of “Fast failure” </li></ul><ul><ul><li>It’s the next best outcome after success </li></ul></ul><ul><ul><li>However, it’s the complete antithesis of success </li></ul></ul><ul><ul><ul><li>Zappos/Tony Hsieh anecdote </li></ul></ul></ul><ul><ul><ul><li>Many, many other examples </li></ul></ul></ul><ul><li>When to pull the plug </li></ul><ul><ul><li>Obvious: if you run out of money </li></ul></ul><ul><ul><li>You clearly don’t have what it takes (try for a team-acquisition) </li></ul></ul><ul><ul><li>There’s something clearly better (Odeo anecdote) </li></ul></ul><ul><li>If success is out of the question, investors will prefer you figure it out before you run out of $ </li></ul>
  4. 4. Relationships, and salesmanship <ul><li>“ Selling the company” = CEO’s #1 job </li></ul><ul><ul><li>Along with hiring the team, building the business ;-) </li></ul></ul><ul><li>Every single conversation is a chance to “sell” the company </li></ul><ul><ul><li>At same time as heads-down building a company, you should always be in “sales” mode, forging and strengthening relationships </li></ul></ul><ul><ul><li>Regardless of product/tech success, you want to be in the forefront of people’s minds </li></ul></ul><ul><ul><li>This applies to bizdev, sales, recruiting </li></ul></ul><ul><ul><li>In particular, every PR push is a chance to “sell” the company </li></ul></ul><ul><li>Things often boil down to relationships </li></ul><ul><ul><li>Buying companies is not like buying breakfast cereals. </li></ul></ul><ul><ul><li>It’s a LOT more like marriage – starts with dating, gets serious, etc </li></ul></ul><ul><ul><li>One ultimate litmus test will be: “do I want these folks on my team?” </li></ul></ul>
  5. 5. Plan ahead <ul><li>Map out potential acquirers early on </li></ul><ul><ul><li>Get introduced, connected, stay friends, stay close </li></ul></ul><ul><ul><li>Make contacts up and down throughout orgs of potential buyers </li></ul></ul><ul><ul><li>Ideally select investors who have high-up contacts too </li></ul></ul><ul><ul><li>iLike anecdote </li></ul></ul><ul><li>Build your company to be valuable to your acquirers </li></ul><ul><ul><li>DO: make sure your product plan enables your exit </li></ul></ul><ul><ul><li>DON’T: build features ONLY because they might help you get acquired </li></ul></ul><ul><ul><li>Examples: </li></ul></ul><ul><ul><ul><li>if building a music company, you won’t get acquired if you haven’t figured out the record-label licensing story ahead of time </li></ul></ul></ul><ul><ul><ul><li>If building a mobile company, even if the primary $ opportunity is on iPhone, plan to support Android and Windows Phone so Google and Microsoft can consider acquiring you </li></ul></ul></ul>
  6. 6. How to initiate the “A”-word <ul><li>Timing is everything </li></ul><ul><ul><li>On your side, the right time is when things are going WELL, when growth is beyond your hopes and dreams </li></ul></ul><ul><ul><li>On the buyer’s side, the right time is when the stock market is booming, the company is planning big bets </li></ul></ul><ul><li>Initiating the discussion is a game of finesse </li></ul><ul><ul><li>Don’t say “acquisition”, say “deep partnership” </li></ul></ul><ul><ul><li>Dating analogy </li></ul></ul><ul><ul><ul><li>You’d never say “I think you’re hot. Wanna sleep together?” </li></ul></ul></ul><ul><ul><ul><li>Many stages of flirting, dating before getting engaged, married </li></ul></ul></ul><ul><ul><li>Find a 3 rd party “match-maker” or Board member who can be more direct (Tellme anecdote) </li></ul></ul>
  7. 7. Stages of acquisition process (after a Buyer is officially interested) <ul><li>Building the internal case </li></ul><ul><ul><li>High-level strategy/synergy mind-meld </li></ul></ul><ul><ul><li>PPT and XLS files to “justify” the strategy and price </li></ul></ul><ul><li>High-level price discussion </li></ul><ul><li>Prelim due diligence </li></ul><ul><li>Term sheet (non-binding) </li></ul><ul><li>Full due diligence </li></ul><ul><li>Definitive agreement </li></ul><ul><li>Closing </li></ul>
  8. 8. How you come up with a price <ul><li>There’s no science or equation to it </li></ul><ul><ul><li>Ultimately the CEO needs to be an exceptionally good salesman </li></ul></ul><ul><ul><li>If you quote too high, you may burn all future chances for a deal </li></ul></ul><ul><ul><li>If you quote too low, you may appear desperate </li></ul></ul><ul><li>Ideal situation = bidding war (LinkExchange anecdote) </li></ul><ul><ul><li>If one doesn’t exist, try to concoct one. Hardest part is getting the first bid </li></ul></ul><ul><ul><li>Bankers are extremely helpful to navigate this – process generates timing urgency, and you’re shielded from the price brutality (stay friends with all buyers, bankers take the heat) </li></ul></ul><ul><li>Team + technology acquisitions </li></ul><ul><ul><li>Obviously a lower price, these are the most common. Price usually undisclosed, because it’s barely more than salaries </li></ul></ul><ul><ul><li>But some exceptional cases – example Aardvark, tens of millions. In a good economy, even these fetch amazing prices </li></ul></ul><ul><ul><li>Importance of PR especially in these cases, when your spreadsheet value is zero. </li></ul></ul>
  9. 9. Closing a deal is NOT easy <ul><li>Price is almost never the hardest issue. </li></ul><ul><ul><li>Getting buyer to fully commit is hardest (regardless of price) </li></ul></ul><ul><ul><li>You need multiple champions. Even when the buyer’s CEO is the champion, things fall through. (iLike anecdote) </li></ul></ul><ul><li>Due diligence + process takes months. Anything can happen in that time (another iLike anecdote) </li></ul><ul><li>Incredibly stressful time </li></ul><ul><ul><li>Hard to juggle “day job” with full-time due diligence </li></ul></ul><ul><ul><li>Hard to maintain secrecy of proceedings. </li></ul></ul><ul><li>The closest you ever get is 50% - until it’s closed </li></ul><ul><ul><li>Leave no stone unturned if it can help you achieve the goal </li></ul></ul><ul><ul><li>DON’T get greedy. (secret anecdote) </li></ul></ul>
  10. 10. Early preparation can reduce stress <ul><li>Due-diligence can eat up all your time, being organized early on makes it much easier </li></ul><ul><li>Share a Dropbox folder with your corporate legal team </li></ul><ul><ul><li>All signed company contracts in a single folder (everything: office lease, corp NDAs, etc) </li></ul></ul><ul><ul><li>All employee agreements and NDAs signed , in a single folder </li></ul></ul><ul><ul><li>Proper exit-paperwork signed for departing ex-employees </li></ul></ul><ul><ul><li>All patents (provisionals, filed, granted) in a folder, with a summary of status across all patent applications </li></ul></ul><ul><li>Use a Google Spreadsheet for your engineering team to keep a list of all 3 rd -party code you use (whether open-source or not) </li></ul><ul><li>Use a Google Doc for your engineering leads to document overall company architecture. You’ll need it for due diligence anyway, so may as well benefit from having it along the way too </li></ul><ul><li>Advance prep also makes it easier to avoid broad disclosure </li></ul>
  11. 11. Challenges – you vs. investors <ul><li>Liquidation preferences – if acquisition price is a “down-round”, can put you at odds </li></ul><ul><ul><li>Avoid “participating preferred” VC deals </li></ul></ul><ul><li>Retention bonuses – investors may question the $ split btwn shareholders vs future employees </li></ul><ul><ul><li>Remember, your job is to create shareholder value </li></ul></ul><ul><li>Now vs. later – many investors (esp VCs) want to see you shoot for $1b valuation, not allow you to sell “early” for only $50m </li></ul><ul><ul><li>The way to avoid this is to avoid over-optimism in Board mtgs </li></ul></ul>
  12. 12. After deal closing (if you make it) <ul><li>Life isn’t over. For the buyer, it’s only just begun </li></ul><ul><ul><li>Roles for the new team, employee retention </li></ul></ul><ul><ul><li>HR on-boarding, benefits, payroll, etc </li></ul></ul><ul><ul><li>Technology integration </li></ul></ul><ul><li>“ hold-back” money </li></ul><ul><ul><li>Retention bonuses </li></ul></ul><ul><ul><li>Earn-out based on goals </li></ul></ul><ul><ul><li>Escrow </li></ul></ul>
  13. 13. Questions ?