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Exit options for Startups


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What entrepreneurs need to know about startups !

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Exit options for Startups

  1. 1. Show me the money !
  2. 2. How do startups create value ?
  3. 3. By creating the business, building it – and then selling it ! The Exit Is Just As Important As The Investment !
  4. 4. What’s your goal ?
  5. 5. Be the gorilla in the room ?
  6. 6. Or build to flip ?
  7. 7. Or create a cash flow business ?
  8. 8. Investors think differently from entrepreneurs
  9. 9. Exit : Why sell? 1. Liquidity needed ( by founders and/or funders) 2. Time to move on 3. Missionary vs Mercenary entrepreneurs 4. Extrinsic reasons – an offer you can’t refuse !
  10. 10. Exit : To whom? Friendly ? Hostile ? Voluntary ? Involuntary ? Strategic ? Financial ?
  11. 11. Exit : The key variables ! Price. Consideration - Cash / Shares Carve-outs ( for management) Reps, Warranties, and Escrow Integration plan - post acquisition Packages - ESOPs, vesting, cash outs Regulatory approvals ( NCLT) The process takes time!
  12. 12. Happy Exits IPO Series A/B/C for seed stage investors Secondary sale M&A
  13. 13. Unhappy Exits Startup dies – runs out of cash. Shut down in a disciplined fashion – no loose ends Be kind to yourself – you will get another chance Zombie companies – plod along on life support
  14. 14. Salvage some value?
  15. 15. Salvage some value? •Slump sale •Acqui-hire •Liquidate and monetise assets, such as IP ?
  16. 16. End games •Inbound M&A – many flavours 1.Large company – attractive offer 2. Large company – squeezes you 3. Other startup – forced merger
  17. 17. THINKING ABOUT EXITS? Start with the end in mind ! Keep an open mind ! Startups are designed for sale – When the market is frothy and the going is good) – When things are going downhill (sell before you tank) – Before raising another VC round( the more you raise, the more you are at their mercy)
  18. 18. accept refuse
  19. 19. Different players with competing interests •Co-founders •Employees •Investors •Customers •Supply chain and partners
  20. 20. Managing the exit •Rumours amongst employees ! •Is the company for sale ? Will we lose our jobs ? Or get rich ? •Media attention •Investors and their egos
  21. 21. EXIT STRATEGY Strategy: – Anticipate the acquirer’s needs – skate to where the puck will be – Pick the right acquirers to talk to – woo them ! -Talk to investors as well – VCs are good at financial engineering
  22. 22. Potential Buyers - 1 “Companies I should partner with today” We can collaborate to serve new customers and generate more revenue
  23. 23. “Companies that should acquire me eventually” •They can accelerate my growth (distribution, pricing, adjacent products) •I can help them grow market share in a changing marketplace ○ Diversification (with synergies) ○ Geographical expansion ○ Response to competitive threat Potential Buyers - 2
  24. 24. EXIT DISCUSSIONS Positioning – Tell a good story – Sel the future potential - “what could be” -- Sell when you are at a high/peak !
  25. 25. EXIT DISCUSSIONS – Negotiation – Create a win- win – Closing the deal efficiently and effectively
  26. 26. The Market External factors you can’t control Bull market ? Frothy valuations Herd mentality Volatility 42
  27. 27. DOING THE DEAL – How to get what you want · Exiting is a Process – Optimum exits require an active sales process · Time Is Not Your Friend – Deals can unravel if they drag on too long (cold feet phenomena) – Every step should have a deadline (real or created)
  28. 28. DOING THE DEAL – How to get what you want •Friction Is The Enemy – Establish trust early (but verify) + open communication flows – Make sure your papers are in order – compliance and regulatory – Goldilocks Strategy for bringing in lawyers – not too early, but not too late
  29. 29. Valuation - Beauty lies in the eye of the beholder
  30. 30. Who decides? Balance of power Buy vs. build Cash vs. stock Earnouts Valuation is a black box - more art than science ! The Deal
  31. 31. Strategy + Process + Help + Heat = A Successful Exit
  32. 32. DOING THE DEAL – How to get what you want ! Heat Formula: Acquirer need/desire X number of bidders at the table = Speed &Terms of the Deal
  33. 33. Doing the Deal · Plan Exit Strategy Early – Don’t wait too long; make the “end game” part of your overall operating strategy · Don’t Get Greedy – Pigs get fat, hogs get slaughtered
  34. 34. Doing the Deal - Ensure Investor / Entrepreneur alignment .Get written Board approval. - Obligations to: Debtholders Shareholders Employees Founding team Customers
  35. 35. Doing the Deal · Negotiate Tough, But Fair – A “friendly acquisition” is a good thing (you may be working for the acquirer when the dust settles)
  36. 36. Strategic value to increase exit value Acquired company increases value of buyer 1 + 1 = 3: • Take out competition • Understanding synergy for buyer • Make sure the buyer understands your business potential
  37. 37. Set up Bidding Wars ! Multiple bidders Safety: 33% of transactions fail Predictability: Safety net Negotiation strength: Better deal terms
  38. 38. Set up Bidding Wars ! Maximize value: Increased attractiveness Effective governance: Picking the best deal
  39. 39. Don’t do this by yourself – Get experienced advisors 1 Voice of reason during trying times 2 Many M&A transactions fail. Increased risk of failure without advisors 3 Game of chess 4 The process takes time and sucks energy – huge distraction 5 Advisors are expensive , but worth it !
  40. 40. The Buyer’s Perspective – Large Companies -For large companies, Acquihire is the new R&D - Happy to acquire startups with a great team, a successful product and a proven business model
  41. 41. The Buyer’s Perspective – Large Companies Perfect Storm: Big Idea + Momentum + Distribution + Capital = Win /Win
  42. 42. The Buyer 1. Want to hold on to the team 2. Minimize money going to ex- investors 3. Do due diligence quickly 4. Have an overall budget for acquisition (purchase price for company plus salaries for team) 5. Painful process, involving a large team
  43. 43. The Buyer’s Perspective Retention is a critical problem for buyers: ○ Tight job market ○ Tech leadership is rare and valued ○ Value is created post-closing
  44. 44. The Buyer’s Perspective Team retention is a critical problem for buyers Differing interests on both sides of the table Employees vs Existing Investors
  45. 45. The Buyer’s Perspective about the team Salary, Signing Bonus, plus retention Bonus ○ Integration ○ Work for 1-3 years ○ Vesting and cash-out
  46. 46. Myths about Exits “If things don’t work out, we can always sell the company in an acqui- hire” “Big tech companies routinely buy startups” “My company will be valued the same way by acquirers and investors”
  47. 47. Myths about Exits “If a strategic buyer offers to pay a premium for my startup, I should play hardball and shop the company”
  48. 48. Are you working for your benefit or your VC’s? Cheap & lean startups + smaller funding rounds + new funding sources + faster start up lifecycles + shorter time to (fail or) exit = The New Opportunity.
  49. 49. Early exits can make sense! · Entrepreneurs usually like to create and grow, not manage Start it, build it, sell it-- and then start again (or become an angel investor)
  50. 50. Early exits can make sense! · Mis-alignment of goals and time horizons between investors and entrepreneurs – Venture-backed companies average 10-12 years from VC financing to M&A exit – Many founders are highly diluted by this time and have lost motivation
  51. 51. Big company culture - toxic or supportive ? Synergies? Who stays ? Who decides ? Timeline ? Handcuffs and cash-outs After the Exit: The Hangover
  52. 52. After the Exit: Keep Going
  53. 53. 1. Serial entrepreneurs – new business, same domain after non-compete; new business, new domain 2. Support the startup ecosystem by angel investing and mentoring 3. Entrepreneur in Residence After the Exit: Keep Going