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Startupfest 2013 - Build 2B bought! - Randy Smerik


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You never want to have to sell your company … but you always want to be bought! Always remember that you have two products: what you design, build, and sell -- and the company itself. In this workshop, we'll look at how an “exit strategy” is an essential part of any solid business plan. Bottom line: you want to create a company that is an irresistible target for buyers – yes, you do!

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Startupfest 2013 - Build 2B bought! - Randy Smerik

  1. 1. Build 2B Bought Randy Smerik Founder/CEO, Osunatech, Inc. July 11, 2013 1Randy Smerik International Startup Festival
  2. 2. 2Randy Smerik Fundamental Premise: Having a Business Focus your Exit Strategy is Healthy and Good for You Let me show you why …
  3. 3. Context: 4 Business Outcomes 3Randy Smerik Failure Company shuts down or asset sale where there is a loss for all involved Lifestyle Business reaches critical mass and profitability and provides an income for its exec team and employees M&A Business is bought and incorporated into a larger entity at some profit to investors IPO Initial Public Offering Our focus is here
  4. 4. IPO versus M&A Venture Exits VC backed liquidity events 4Randy Smerik Since 2000, median is 90% of exits are M&A
  5. 5. IPO versus M&A Exits – Part 2 VC backed liquidity events 5Randy Smerik 2009 – 3.1% 2010 – 14.7% 2011– 10.8% Trend continues in 2009-2011
  6. 6. M&A Transaction Volume by Deal Size Private Targets - Internet, Communications & IT Infrastructure Software & Services M&A – Q1’2011 6Randy Smerik source: SagePoint Advisors Average M&A transaction is $12M and median is $10M
  7. 7. Let’s see what Google Says • We care about Google because in the last 2 years Google has been the most active M&A buyer with over 65 transactions – Next on the list would be EMC (25), AOL (24), and Cisco (19) • Charles Rim (former top Google M&A guy) stated: – “90% plus of our transactions are small transactions. Less than 20 people, less than $20M and that is truly the sweet spot” – “We do prefer companies that are pre-revenue” 7Randy Smerik
  8. 8. Reality versus Hopes & Dreams • The reality is that if you have a successful outcome to your business it will likely be an M&A event worth approximately $20M • Logic would suggest that you should at least factor that into your business planning • But, we are typically encouraged to “swing for the fence” and “never say die” • Why? One big reason is because traditional funding options require that mentality to support their business model 8Randy Smerik
  9. 9. 9Randy Smerik Getting funded … … with your Eyes Wide Open!
  10. 10. Enter: Crowdsourcing & Social Networks$$$ Desire for Control/Information Friends & Family Angels Seed & Incubator Convertible Debt Super Angels Traditional VC’s 10Randy Smerik Social Graph and Viral Note: there is lots of overlap between these categories in the real world
  11. 11. 11Randy Smerik Let’s look closely at traditional VC’s … Why? Because traditional VC’s tend to exert the most control in the form of Protective Provisions and due to the inherent nature of their business model - and, this can affect your exit!
  12. 12. Trends in the VC World 12Randy Smerik
  13. 13. Issue: VC’s need some 10x Returns • Why? – Limited Partners in a VC fund expect ~20% return per year – Typically, returns come from 20% of the investments, i.e. out of 10 companies funded 2 will provide returns – Due to the length of time the money is typically tied up in companies and how long the funds are for, the capital only gets to be invested once – When you do the math, the average return of those two winning companies needs to be over 10x (actually more like ~30x). 13Randy Smerik
  14. 14. Yikes. This is a Problem. • Simple scenario: – A VC invests $2M on an $8M pre-money valuation company – This gives the VC 20% of the $10M post-money company – To get 10x (forget about 30x) the VC will need a $20M return – At 20% ownership, that means that the company must sell for $100M – But … the average M&A deal is more like $20M! 14Randy Smerik
  15. 15. VC’s – Go Big or Stay Away • To make the 10x work for the VC and still stay with the average M&A exit of $20M, it would need to be an investment of $1M with a pre-money of (only!) $1M • To be clear, the VC’s are not evil; they just have a business model and LP’s with expectations 15Randy Smerik Round Typical VC Expectation Example post- money Exit needed Series A 10x (up to 30x) $10M $100M Series B 4x-7x $50M $200M Series C 2x-3x $150M $300M
  16. 16. VC’s Entrepreneur10 Entrepreneur1 Entrepreneur2 Entrepreneur3 Entrepreneur4 Entrepreneur9 Entrepreneur8 Entrepreneur7 Entrepreneur6 Entrepreneur5 $$ $$ $$$$ VC Perspective Different Perspectives, but: VC’s will Protect their Model • VC’s may fight to keep a company going longer even if the entire management team and angels feel it’s better to sell • Techniques: create separate voting classes (preferred) where each class must approve exits; “protective provisions” with veto rights; control of the Board; and more 16Randy Smerik 20X 10X Entrepreneur Vision Hopes/Dreams Angels VC’s $$ Entrepreneur/Company Perspective
  17. 17. Pre $2,000,000 Investment $500,000 CEO 40% Staff 40% Angels 20% VC 0% Post $2,500,000 Angel Round Angel Round of $500K at $2.5M post Let’s See What Could Happen in a Real-world Scenario 17Randy Smerik VC Round $10,000,000 $3,000,000 31% 31% 15% 23% $13,000,000 VC adds $3M at $10M pre M&A Offer $40,000,000 $12,307,692 $12,307,692 $6,153,846 $9,230,769 M&A offer at $40M x Return 12.3 3.1 Multiples • Great exit for CEO/Founders/Staff - $24 million for them • Angels see a 12x return • VC sees a (mere) 3x return and may veto the transaction This example assumes all shares are Common; if 1X PP, then the VC return is 3.8x
  18. 18. 18Randy Smerik OK, that was fun … Let’s assume you’re funded. Now, what do Buyers want? (and never forget, you want to be Bought and not Sold!)
  19. 19. What Buyers Look For Exciting Stuff 1. The Product 2. The Team 3. The Vision 19 More Boring Stuff 1. IP Ownership 2. Cap Table 3. The Team “Sets the Hook” “Lands the Fish”
  20. 20. Being Ready for a Successful Exit 20Randy Smerik Ensure there is always something attractive to be bought: 1) Product/service with Value, 2) Solid Team, & 3) Strategic Long Term Vision Consistent and Shared Exit Strategy Active Player in Market and Ecosystem Ensure your Exits Options are Always Open
  21. 21. CEO = “Chief Exit Officer” • The Exit: Just another business process – Like marketing, sales planning, budgeting, quality management, product development, etc. • No need for it to be a distraction – Manage with the team like anything else 21Randy Smerik Given that 90% of successful outcomes are M&A it would be pure negligence for a company’s management team to not have this be a top level business focus!
  22. 22. 22Randy Smerik Good Luck! Bon Chance! Thank You! Merci Beaucoup!