Why have an Exit?
A bit under half of start-ups take investment money from angels or VC. All have a significant investment by the founders of money and time. The Exit is the return for the risk, investment and hard work, without an exit you just have a hobby.
Starting and raising funds all get exposure. Much is written about the very large exits – the unicorns, however early exits are often ignored. Yet of the exits, over 50% will be early exits and for less than $50m. In fact the average Australian Tech Startup exits for $17m. (Not a bad days work but so so good for two decades work!!).
The Exit strategy is a plan to sell the business to others. (An IPO can be thought of as a sale to the public). Only about 26% of startups will have a successful exit. To see the change of your startup progressing to a unicorn IPO or trade sale, see the diagram to the left.
Of the 100% of startups, 17% will exit without any formal capital raise, and 27% will go on to raise some sort of funding. That leaves 56% who will either fail or become a zombie company – The business grows slowly but surely. Revenues climb and the company can stay around cash flow break-even because it is only making modest investments in growth. However, the growth rate for the business is in the low single digits, the company cannot attract a big slug of capital to force growth, and the company remains below the radar of any potential buyer.
Once funding is secured, the chance of exits improve and the chance of moving to another capital raise also improves. However, the number of companies exiting can be significantly improved if founders do a few things:
- Be prepared for an Exit – have all your governance, accounts, contracts etc up to date
- Always be open to an offer
- Actively plan your exit
- Get an advisor who can drive the process.
The various type of exits available are:
If you haven’t yet got into bed with a VC fund, then an Early Exit is often the best way to monetise your investment in your startup. A double or a triple return on investors money is a great exit if it happens with 2-3 years. A double exit in under 2 years is an IRR of around 40%.Positive early exits usually fall into one of the following categories:
- A new product that complements a fast growing, large company’s product line
- A disruptive product that has the potential to damage a larger company’s market position
- A new product that fills a newly emerging gap in a big company’s product line
- A new product with strategic patents that a buyer cannot risk having fall into a competitor’s hands
- A new technology or business model that is so innovative that the opportunity to get the team and the goodwill around the brand is irresistible
- A new product that is clearly constrained by lack of sales and that would be instantly accretive and profitable in the hands of a larger sales force.
Traditional Trade Sales
Once you have grown past the startup stage and have started to scale, the most common type of big exit is an acquisition by a larger company, often a public company that can use its highly-liquid public shares as currency. This scenario represents a faster way to get a returned as there are normally less severe lockups on selling than is typical in an IPO or from an acquisition by another privately held company. In many cases, these acquisitions include a substantial upfront payment and then a smaller (10 – 25%) escrow payment that will pay out in 12 to 18 months.
One of the difficulties is that this type of sale is often more a financial sale rather than a strategic sale and it takes quite a lot of skill to capture some of the upside strategic value.
IPOs are often used in Australia as there are so few large companies that are interested in tech acquisitions. However, going to the ASX under $50m market cap is a dangerous proposition as is listing with a negative cashflow. There have been many companies that have been destroyed by that apoproach.
If you want to go the IPO route, it would be better to build a company to $250m plus and then look to the NASDEQ or similar. One way of doing that is to get private equity on board. PE firms are becoming more interested in mid sized tech companies especiually ones with a global market.