A look at how to create winning exits for software companies. Includes data on Canadian IT exits and case studies

1. The End Game
Creating Winning Exit Strategies
March 4, 2016
M A R K M A C L E O D , F O U N D E R | @ S TA R T U P C F O

2. Private & Confidential | 2
A g e n d a
✓ What’s happening? Activity, trends, data
✓ Out in the Wild: Case studies
✓ Lessons learned: How to plan your exit

3. Private & Confidential | 3
I n t r o d u c i n g S u r e P a t h
Funding, growing and exiting venture-backed startups since 1999
Raised over $100M in
VC in the US,
Canada and Asia
◆
3 years as a VC
(Real Ventures)
Worked corporate
development and
exited many
companies
◆
Airbnb
Blackberry
Rackable Systems
Return Path
& others
14 years as CFO for
some of Canada’s
leading technology
companies
◆
FreshBooks
Shopify
Tungle
& many others

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T h e S u r e P a t h D i f f e r e n c e
InvolvementExperience
Access Flexibility Commitment
in the most successful
tech companies
to Tier 1 investors &
strategic partners
to give great service
regardless of deal size
to help Canadian
companies and their
investors succeed
FreshBooks|Frank & Oak|Shopify|
&more
Funding, growing &
exiting tech companies

5. W h a t ’ s H a p p e n i n g ?
E x i t D a t a & Tr e n d s

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E x i t Tr e n d s i n C a n a d a
Source: pitchbook.com
7 7
5
9
4
9
6
9
8
11
13
6
1
1
0
2
4
6
8
10
12
14
Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015
NumberofDeals
Canadian Information Techonology Companies Exits by Type
Merger/Acquisition IPO

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E x i t Tr e n d s i n C a n a d a ( c o n t ’ d )
Source: pitchbook.com
133
104
134
117
143
108
124
109
159
115 117
75
7
7
5
9
4
10
6
9
8
12 13
6
19.0
14.9
26.8
13.0
35.8
10.8
20.7
12.1
19.9
9.6 9.0 12.5
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
0
20
40
60
80
100
120
140
160
180
Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015
Fundraise:ExitRatio
NumberofDeals
Canadian IT Company Fundraises vs. Exits
Fundraising Deals Exit Deals Fundraise - Exit Ratio

8. Private & Confidential | 8
W h o ’ s b u y i n g ?
Source: pitchbook.com
United States
62%
Canada
23%
International
15%
Buyer By Geography
Private
46%Public
54%
Buyer By Type

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B u y e r s - w h o ’ s b u y i n g C a n a d i a n t e c h n o l o g y c o m p a n i e s ?

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E x i t s b y A g e
Source: pitchbook.com
35
24
18
9
10
0 5 10 15 20 25 30 35 40
0 - 5 years
6 - 10 years
11 - 15 years
16 - 20 years
21 - 38 years
Number of Companies
Exits by Age of Company

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E x i t s b y Va l u e
Source: pitchbook.com
64
24
7
1
0
10
20
30
40
50
60
70
Undisclosed < $50 Million $50M - $150M > $150M
NumberofCompanies Exit Values by Size

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Va l u a t i o n s
Source: pitchbook.com
0.6x
1.4x
1.6x
1.7x
1.6x
7.3x
0.0x 1.0x 2.0x 3.0x 4.0x 5.0x 6.0x 7.0x
Communications and Networking
IT Services
Software
EV / Revenue Multiples (TTM)
6.0x
12.2x
12.2x
13.5x
21.3x
21.1x
0.0x 5.0x 10.0x 15.0x 20.0x 25.0x
Communications and Networking
IT Services
Software
EV / EBITDA Multiples (TTM)

13. O u t i n t h e w i l d
C a s e s t u d i e s o f S u c c e s s f u l E x i t s

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Te r r a s c a l e
✓ Sector: Storage software
✓ Status: Revenue-generating (early)
✓ Funding: Seed, Series A
✓ Outcome: 10x return
✓ Deal factors:
✓ Meaningful tech
✓ Joint customers
✓ Had alternatives
✓ Very motivated buyer
✓ Buy-side banker
Post mortem: Great return, but should we have sold?

15. Private & Confidential | 15
L o c a l m i n d
✓ Sector: Mobile, local, social
✓ Status: Pre-revenue
✓ Funding: Seed
✓ Outcome: 25x return (and counting)
✓ Deal factors:
✓ massive free user growth
✓ Unsure about long term prospects
✓ Founders initiated product level talks
✓ Light funding - optionality
Post mortem: Took an all-stock flyer. So far delivering great multiples

16. Private & Confidential | 16
Tu n g l e
✓ Sector: Mobile, productivity
✓ Status: Pre-revenue
✓ Funding: Seed, Series A
✓ Outcome: Very solid single digit multiples
✓ Deal factors:
✓ massive free user growth
✓ Integrations and BD talks with all major platforms
✓ Large user base on the BB platform
✓ Existing BD, marketing relationship
✓ Motivated buyer. Clear fit with a strategic program
Post mortem: Right decision for the company. All cash deal

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G o i n s t a n t
✓ Sector: Collaboration, productivity
✓ Status: Pre-revenue
✓ Funding: Seed
✓ Outcome: > 10x return. 10 months from seed to exit
✓ Deal factors:
✓ Meaningful tech
✓ Driven from the top
✓ Company sold the future
✓ Known investors forced respect
✓ Founder generated alternatives and played hard
Post mortem: Great outcome in a very short time frame

18. L e s s o n s L e a r n e d
P l a n n i n g y o u r e x i t

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E x i t R u l e # 1

20. Private & Confidential | 20
E x i t R u l e # 2

21. Private & Confidential | 21
E x i t R u l e # 3

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B u y e r T y p e s
Founder
✓ Product-driven
✓ Based on desire
✓ Top down
✓ No prior relationship needed
Manager
✓ Fact-driven
✓ Based on clear business case
✓ Pushed up to CEO
✓ Need evidence (joint customers)

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T h e i s s u e w i t h m o s t e x i t s
✓ Most exits are sub $50M
✓ Few credible, specialized exit advisors
✓ You end up doing it yourself
✓ No leverage, expertise
✓ Have to run the company as well
✓ Negotiating with your future boss
64
24
7
1
0
10
20
30
40
50
60
70
Undisclosed < $50 Million $50M - $150M > $150M
NumberofCompanies
Exit Values by Size

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D r i v e r s o f d e a l v a l u e
✓ Alternatives (runway, competition)
✓ Scarcity
✓ Mortal enemies
✓ Growth (fear)
✓ Market leadership (2 way)
✓ Does the buyer’s CEO Want this?
✓ On strategy
✓ Currency
✓ Time and timing (including markets)

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O t h e r c o n s i d e r a t i o n s
Earn Outs:
✓ Disagreement about value
✓ Shift risk to seller
✓ Almost never get paid out
✓ Create risk for both sides
✓ Try and avoid
Management buyouts:
✓ Pursue before 3rd party sale
✓ Timebox
✓ Consider conflict
✓ Can they pay?
Role of VCs:
✓ Corp Dev access
✓ Advisor intros
✓ Secret handshake
Pre-Banking phase:
✓ 18 - 24 mths pre sale
✓ Build relationships
✓ Create optionality

26. Web: surepathcapital.com
email: mm@surepathcapital.com
Blog: startupcfo.ca
Social: @startupcfo
Questions?