Crossroads: Should I Sell OrShould I Grow?By Javier Rojas, Managing Director,Kennet Partners
What Do All These CompaniesHave In Common?                              2
They Were All BootstrappedContrary to     Startups   popularperception,      Microsoft – Started as a contract software d...
Many Markets Produce High                 Growth Market LeadersAll these high        growth   companies          were     ...
Who We Are: Kennet Partners Growth equity firm with approximately $600million  under management Exclusively focused on t...
How to Decide    If market    Will your company be a multibillion dollar market leaders can      leader?  come from any m...
How to Decide: Sale/Timing A methodical    High stakes question:approach to a     • Missteps or indecisions can be expens...
Review the MarketMarket is the     High growth markets tend to grow non-linear      primary                  Most emergi...
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Kennet - Crossroads: Should I Sell or Should I Grow?

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Kennet - Crossroads: Should I Sell or Should I Grow?

  1. 1. Crossroads: Should I Sell OrShould I Grow?By Javier Rojas, Managing Director,Kennet Partners
  2. 2. What Do All These CompaniesHave In Common? 2
  3. 3. They Were All BootstrappedContrary to Startups popularperception,  Microsoft – Started as a contract software developer, raised many of money after the company was profitable today’s  Oracle – Started as a software consulting business, market development of initial relational database product was paid for leaders by a government customer built their initial  Siebel – Substituted equity for employee pay for many founders, used customer revenues to help fund initial product business through  Cisco – Achieved $5 million revenues, profitable prior to “sweat Sequoias initial investment equity”  Broadcom – Never raised capital from venture community  Dell – Did not raise outside capital until they achieved $60 million in revenues  eBay – Achieved $4.5 million revenue run rate and profitable before taking venture capital 3
  4. 4. Many Markets Produce High Growth Market LeadersAll these high growth companies were bootstrap financed Source: Breakthrough Company 4
  5. 5. Who We Are: Kennet Partners Growth equity firm with approximately $600million under management Exclusively focused on technology and technology- enabled businesses Typically first institutional investor in companies with revenues of $5M to $50M Leads investments of $5 million to $30 million individually, up to $50 million with co-investors Primary use of capital is for sales expansion, acquisition finance, partial liquidity for current shareholders Support portfolio companies by development of management team, business strategy, business partnerships and acquisitions 5
  6. 6. How to Decide If market  Will your company be a multibillion dollar market leaders can leader? come from any market,  Market leaders are created from companies like yours how do I  As entrepreneurs, we often see the next opportunitydecide if and around the corner when Ishould exit?  And yet, we face real risks with the majority of our net worth on a daily basis  What are our options? • Sell the company • Sell some of my shares • Raise capital to fund growth • Stay the course 6
  7. 7. How to Decide: Sale/Timing A methodical  High stakes question:approach to a • Missteps or indecisions can be expensive high stakes • Emotional process due to changes involved emotional decision  Approach useful for founders with: • Large equity ownership: Own 10%+ (often majority) • Active in the business • Founder can control outcome  Three major factors are typically involved in the decision to sell: • Market – what is likely to happen to market growth? • Financial – what do the numbers say? • Personal – what are my needs goals and desire?  We recommend looking at each factor independently – these issues can’t be comingled. 7
  8. 8. Review the MarketMarket is the  High growth markets tend to grow non-linear primary  Most emerging markets tend to go through three major independent phases variable for thinking • Early adopter customers / slow or small growththrough your • Mainstream adoption / hyper-growth options • Mature, Late adopters / slowing growth, market leaders established  Most founders have a good feel though: • Don’t get “caught in the moment” • Watch out for over optimism  Independent indicators may signal market stage: • Accelerating sales • Sudden and sustainable increases in the sales pipeline • New competition entering the market • Easier close rates on large customer sales 8
  9. 9. Review the Market Continued…Hyper-growth is At what stage of market development is your company? driven by mainstream Hyper Growth buyers $ Main Mature Market Early Stream Adaptor Market Size Time 9
  10. 10. Review the Market Continued…What stage of  If Early Adopter Market: development • Is hyper growth imminent? is your • What is your “holding cost”? Can you wait? market? • Are buyers willing to value the market potential?  If Hyper growth: • Can you be a market leader? • How defensible is your position?  If Hyper growth is slowing: • Do you see the next market? • Can you develop it fast enough to sustain growth?  If Market is Mature: • Are you the consolidator? • Do you have the capital, skills and temperament to consolidate the market 10
  11. 11. Review the Market Continued…Assess your  Market Stage: Where are you in your market cycle? market • If early, your growth will likely out pace that of your position alternatives: wait unless you get paid for futures  Market Position: Are you positioned as the market leader? • Market leaders should wait unless there is an offer on the table you just can’t refuse. • If not one of the top two players, an early exit may be more compelling.  Competitive threats: Has Google or Wal-Mart entered your market? How defensible is your position? • Do you face a threat? The stronger position you own, the more security you have in maintaining market lead. 11
  12. 12. Review the Market Continued…Hyper-growth At what stage of market development is phase is your company? driven by mainstream Main Stream Product/Service 3 buyers $ Product/Service 2 Market Size Product/Service 1 Time 12
  13. 13. Understand the FinancialsThe financial  Compare the economics of a share sale today with a share analysis is sale in three to five years. quantifiable • Predict revenue growth based on market assessment though still • Calculate dilution from financings subjective • Calculate exit value in 3 to 5 years • Discount back to today’s dollars (higher risk= higher discount rate) • Does the resulting value make you indifferent to a sale today?  If your business is in the rapid growth phase: • Financial analysis will suggest no sale without a high premium • A partial sale may be of interest to reduce risk of high growth  Things to consider: • What is your confidence level on the market / your growth? • What resources will this require? • What management skills do you need to recruit? 13
  14. 14. Consider the Personal AspectsLifestyle goals  Never overlook your personal lifestyle are critical considerations.  Stage of Life: A founder-entrepreneur late in their career with relatively few assets will approach liquidity with a different risk profile than someone early in their career.  Considerations: • Risk Profile • Real Money • Personal Growth • Changing Roles 14
  15. 15. Personal Aspects : Risk ProfileWhat is your  Are the company shares your primary asset?risk profile?  Are unrelated assets sufficient if the business fails?  What stage are you in your career?  Do you already have a “win” or “exit” under your belt  Are the company capital requirements and your financial security at odds to: • Maintain/grow market share • Pursue new high growth markets  Would a stronger balance sheet influence decision making? • Personal resources • Corporate balance sheet  Would a financial recap/partial liquidity make a difference? 15
  16. 16. Personal Aspects : Real MoneyWhat is your  All entrepreneurs have different financial goals financial goal? • “ $100 million isn’t cool, $1 billion is cool..” - The Social Network • Where does your risk tolerance start to fall?  Separate needs from wants • Needs are often basic, a small share sale can address them • Wants are long term or aspirational: set up a plan to attain them • Entrepreneurs tend to pursue the next big thing before winding down the last one: Know your financial goals  If you hit real money: you need a good reason to NOT pursue a sale 16
  17. 17. Personal Aspects : Personal GrowthWhat are your  All entrepreneurs have different personal personal aspirations growth objectives? • We will have won when everyone knows our product • I want to be the market leader known for XXX • I want to lead an organization of XXX • I have never taken a company public and would like to do that • I want to keep building great products  Recognize you may have nonfinancial drivers continuing to drive you and your business forward • Recognize them early • Identify when they are at odds with other decision factors 17
  18. 18. Personal Aspects : Changing RolesHow will your  Founders often have trouble managing through job change? company growth • Separation of company goals from founder goals • Less inventing, more leadership and management • Fewer direction shifts, more execution of long term goals • Many early executives won’t be able to scale (entrepreneurs are loyal!) • Often new management skills must be recruited • Evangelize core values and mission statement  Growth requires new support resources for the CEO • A formal board • Advisors • Financial controls  Do you want to change? If not, can you develop or bring in resources that can purse predictable growth? 18
  19. 19. Situation AnalysisAnalysis will  After analyzing each category, step back point to an • Identify every point in favor or against action plan • Score each category with a plus or a minus. • Alignment across all three indicates a sale is prudent • Mixed outcomes spotlight development areas, alternatives  If categories don’t align: • Understand why, can the issues be fixed • Timing may help, when will they align, begin panning for that timetable • Partial sale may help − Reduce risk − Fund growth − Bring in board, talent, experience for growth phase  Full Article: http://www.sterlingreport.net/articles/article250.html 19
  20. 20. Decision Matrix Mixedoutcomes Market Finance Personal spotlight + - + areas to address - - + - - + - - - _________________________________ - - + + = Sell, - = Don’t Sell 20
  21. 21. Key Issues to Consider FundingGrowth Is my business entering, or ready to enter its growth phase? Would an investment in sales yield positive returns? What financial resources do I need to achieve this? Will the economic benefit of an investment outweigh the dilution? What management support/resources do I need to accelerate my growth? 21

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