The Exit Strategy is a plan for the capital side of the business
Often founders have the mistaken belief that they will
“raise a few rounds and in a few years we’ll IPO on Nasdaq/ASX”
The more likely scenario is:
You invest a few years of hard work to build something of value, bootstrapping your company and relying on the Family, Friends and Fools investment group. If you are lucky, and with a lot of hard work, you could also attract some seed funding. Then one day you receive an acquisition offer out of the blue. The management team is elated but you’re not prepared. You drop everything to focus on this opportunity. You sign a non-binding offer and start exclusive due diligence. It is not long before you realise that your company is a mess, (contracts are missing, accounts are not up to date, the IP filing has not been completed). Days become weeks; weeks become months and throughout this time you have been neglecting the business. Fundraising has been put on hold and so you are starting to run out of money.
That’s OK because you still have an M&A Exit…..However, the potential acquirer comes back with a whole list of faults and holes and drops their price. You have no other option but to accept the offer.
This, unfortunately is more common than it should be. Founders spend a lot of time on the fund raising and on the growth of the business yet a fraction on the exit.
The diagram below shows the path startups took through funding and exits. Only 26% of startups exited and 97% were M&A exits (that is being acquired). The rest either fail or become zombie companies – stuck with a small positive cashflow but no real growth prospects without funding yet with an inability to raise funds.
Exits matter because that is when you, your team and your investors get paid. Oddly enough, we hear a lot about the startup (lean startup, MVP etc) and the funding stages (pre-seed, seed, series A etc), but very little about the Exit, especially Early Exits and smaller value exits. As a result, founders miss opportunities or leave money on the table.
In a series of a series of Master Classes that tapped the expertise of corporate buyers, bankers, investors, lawyers and startup CEOs with M&A or IPO experience in San Francisco and run by Techcrunch, the following observations were made:
“Founders must be aware of what contributes to an exit. This means understanding partnerships and how they are formed in the business space the entrepreneur is working in,”
As founders, you build your product, your company and… optionality. You need to understand the options open to your company, and take steps to enable them.
The most likely one is an acquisition, but there are others like IPO (including small cap), RTO, SBO, LBO, Equity Crowdfunding and even ICO.
“Exit is not a goal per se, but as a CEO it is something you should think about as early in your cycle as possible, while being business-focused,”
“Exits should be on the CEO agenda. Not front and center, but on the agenda. M&A is a by-product of a great business and targeted BD. IPOs are always an option once you’ve built significant cashflow forecasting.”
It’s important to ask questions like: How many “strategic engagements” with potential buyers have you had this month? Is your message and value clear in their eyes? Have you considered an acquisition track in parallel to a fundraise?
One thing is sure: The time to exit is not when you’re running out of money.
What are the elements of an Exit Strategy?
A capitalisation table (or cap table) provides a record of the ownership of the company’s equity and debt instruments. It should also allow you to make projections around a series of capital raisings and then an exit. Each class of investor will have a different return form an exit depending on the liquidation preferences and dividend accrual options. as well as their buy in price.
Lifting Your Company Profile
Potential Buyers are unlikely to buy a company they have never heard of. For example, to get on the acquisition radar of IBM, you need to have your customers singing your praises TO IBM. The Exit Plan answers the questions:
- Who are our likely buyers at each exit opportunity, and
- How do we make sure they know all about us?
Being ready means being able to pass a due diligence. This is the process whereby the potential buyer finds out EVERYTHING about the target. Keeping a due diligence database populated and current is quite a task but it will benefit you enormously, particularly if a fantastic offer comes knocking at the door (this does happen, just not as often as people think).