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How to Exit Your Startup in 12 Months (or sooner)

Seattle's Alliance of Angels (AoA) sponsored webinar for startup founders and angel investors. July 15, 2020. Hosted by Dave Parker with guests, Mark Upson of NextPath Advisors, Gary Kocher, K&L Gates, and Yi-Jian Ngo of AoA.

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How to Exit Your Startup in 12 Months (or sooner)

  1. 1. How to Exit your Startup in the Next 12 Months (or less) A FOUNDER’S GUIDE WEBINAR NEXTPATH ADVISORS
  2. 2. Agenda Introductions Choose Your Own Adventure! Building a Market Map Valuation and Terms Due Diligence Case Studies Business Development as a Process Q&A NEXTPATH ADVISORS
  4. 4. Alliance of Angels – Dedicated to Funding NW Startups AoA is at the Center of Startup Funding in Our Region ◦ Largest Angel Group in the PNW with 140 members ◦ A member mix of angel investors (including many of the area’s "super angels“), prominent family offices and local VC’s. ◦ #1 funder of female led startups in the PNW. AoA Funds the Most Deals ◦ AoA invests in over 20 deals per year with total investment over $10 million - more than any other angel group in the region. ◦ Average amount invested per deal ranges between $250 - 500k. ◦ 50% of companies presenting at AoA member meetings get funded. ◦ AoA members invest in startups across a wide range of business sectors. Contact:
  5. 5. Alliance of Angels – Dedicated to Funding NW Startups Having AoA Investors Builds Credibility for Further Fundraising ◦ AoA members are highly networked to other sources of capital. ◦ A number of area angel groups attend AoA meetings so they can spot good startups to being to their investors. ◦ 80% of entrepreneurs who received AoA funding successfully completed their round. AoA Can Help With More Than Money. ◦ AoA members have deep business experience in a wide range of sectors and disciplines. ◦ Many members are entrepreneurs currently or have been in the past ◦ They can provide invaluable business advice, useful contacts and connections for further rounds of financing. Contact:
  6. 6. Introductions Mark Upson – Managing Partner, NextPath Advisors Gary Kocher – Partner, K&L Gates Dave Parker –Startup Founder & Community Builder NEXTPATH ADVISORS
  7. 7. Market Conditions NEXTPATH ADVISORS
  8. 8. Choose Your Own Adventure NEXTPATH ADVISORS Fundable? • Predictable & forecastable revenue • Marketing and Sales Motion • >50% Annual Growth • Raise $5M exit >$50M Time to Sell? • Support from existing investors or tired • Not on the Unicorn track • Solid growth <50% annually About You? • Ready for the next adventure? • Material return for founders and team
  9. 9. Market Map: Key Factors for Different Acquirer Groups NEXTPATH ADVISORS Strategic Acquirer • Build vs buy to fill product gap • Revenue/growth rate/profitability validate team, product, and GTM • Prefer to acquire companies that they already have a working relationship with • Positioning for sale at best valuation can take 12 months or more PE Firms/Aggregators • Typically looking for a minimum of $3-5M in revenue • Rule of 40: Growth rate + EBITDA rate > 40% • Breakeven or Profitable (path to $1M annual EBITDA) • Buying based on financial model and sector potential • Acquisition discussions can move much faster than those with strategics
  10. 10. Valuation Factors NEXTPATH ADVISORS Multiple Bidders can increase Exit Revenue Multiple by 20-50% Exit valuation drivers Company Revenue Company Growth Rate Sector and Addressable Market Profitability (if profitable, brings PE firms into play) Customer Retention Rate Private Company multiples tend to run at 25% discount to public due to lack of liquidity (Median private company SaaS multiple is 4.5x TTM)
  11. 11. Valuation Multiple Influencers NEXTPATH ADVISORS
  12. 12. Typical Offer Components NEXTPATH ADVISORS • Asset vs Share Purchase • $ to shareholders upfront • Escrow • Earnouts Deal Structure • Move to market rate salaries • Time based milestones and/or earn-outs over 2-3 years Key Employee Packages
  13. 13. Due Diligence Checklist Organizational Matters ◦ Articles of Incorporation ◦ Bylaws ◦ Minutes Founder Matters ◦ Stock Purchase Agreements ◦ Vesting Schedules ◦ IP Assignment Agreement Financial Statements ◦ Balance Sheet ◦ Income Statement Security Issuances ◦ Prior Funding docs Employee /Service Provider Agreements ◦ List of all persons providing services ◦ Current and past employees IP ◦ Patents, Trademarks, Copyrights ◦ Domain Names Material Agreements ◦ Standard Form Agreements ◦ Insurance ◦ Indebtedness Leases ◦ Real Estate Disputes/Litigation ◦ Any correspondence or documents threatening action Regulatory Matters ◦ Inquires or applications Taxes ◦ CPA Firm ◦ Tax Returns NEXTPATH ADVISORS Link above includes 4-page detailed downloadable Word Document
  14. 14. Deal Blockers/Breakers NEXTPATH ADVISORS Inflated Exit Expectations (“I wish I had taken the deal is #1 lament….) Poor Corporate Hygiene (Taxes, Corp Docs not in order) Bad or Unknown News (Moral is to get deal done ASAP) Surprises in Diligence (Better to confess than be found out)
  15. 15. Case Study – Strategic Exit NEXTPATH ADVISORS
  16. 16. Early Stage B2B Software Company NEXTPATH ADVISORS Ongoing Business Development Discussions with Strategics One strategic indicated working toward an LOI Ran a Dual Process of Fundraising and M&A Discussions Contacted all other strategics to assess their buy vs. build interest level Within 30 days, closed with a different strategic from the initial bidder with an 88% premium over the initial bid Extremely high TTM multiple based on technology fitting market gap
  17. 17. Case Study – PE Exit NEXTPATH ADVISORS
  18. 18. Mid-stage B2B Software Company NEXTPATH ADVISORS Focus on Business Development with goal of M&A within 12 months Identified 5 New Industry Segments and 57 Potential Partners Revamped website, product roadmap, and demos to address overall market positioning and new categories Contacted the prioritized partners at senior executive level to assess fit and partner interest. Developed GTM plans with engaged strategics Drip marketed private equity firms Unsolicited bid made for company as a result of process with a negotiated exit well above market (8.3X TTM). Partner Development Process – 7 months, M&A Process - 2 months
  19. 19. Business Development Driven M&A NEXTPATH ADVISORS Strategics Build Market Map and prioritize targets based on product fit and business case Outreach to establish working relationships (integration, OEM, reseller, etc) Focus on top 3-5 potential acquirers and prove out the business case Goal is to establish an anchor bidder and then run process around them Private Equity Build list of relevant midmarket private equity firms Prepare diligence materials and begin outreach If running a strategic BD process, can drip market PE firms along the way
  21. 21. Contact Us: Mark Upson, NextPath Advisors - Gary Kocher, - Dave Parker, – Resources ◦ M&A Due Diligence Checklist ◦ Measuring Capital Efficiency of a Software Company ◦ Dave’s Prepping for Exit Reading List - Startup Digest ◦ 6 Month Free OneHub Promo - Register email ( referencing the promo code: VDR2020 NEXTPATH ADVISORS