lean startups and early exits -- startup exit strategy thought piece
TRANSCRIPT
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8/8/2019 Lean Startups and Early Exits -- Startup Exit Strategy Thought Piece
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EXIT STRATEGY FOR STARTUPS
VentureArchetypes, LLC
Startup Advisory + Deal Support
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CHAPTER I: CONTEXTaka, why this matters to you
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WHY THINK ABOUT YOUR EXIT?
...because a solid exit process maximizes value. The Exit Is Just As Important As The Investment
How is value created? By forming a business, building the business, and selling the business
A well-designed Exit can create as much economic value (for founders, investors, and employees) as all theheavy lifting of actually building the business
The Startup Landscape Has Changed Open source, viral media, cloud, EC2, APIs, offshoring, etc. = cheap to start & scale a company
Lean startup model = rapid prototype & testing, multiple pivots (instead of one big business model bet)
Goal mis-alignment between VCs & startups = Angels and super angels are the new funding sources
The Exit Environment Has Changed
IPO market is still (pretty much) dead
For large companies, M&A is the New R&D Large companies have too much cash & need to buy a growth story
Business strategies of acquirers are intersecting (Google vs. Apple vs. Adobe etc.)
Net-Net:Cheap & lean startups + smaller funding rounds + new funding sources + faster
startup lifecycles + shorter time to (fail or) exit = The New Opportunity.
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WHY IT MAKES SENSE TO EXIT EARLY
Lower risk, more return (for Entrepreneurs)
Entrepreneurs like to create and grow, not manage
Start it, build it, sell it-- and then start again (or become an angel investor)
Founders value typically diminishes over time, as co. requires more process, less experimentation
Your key strengths are in creating-- not managing the people, systems and structure of a large enterprise
The VC model breeds big, swing for the fences companies
Large VC funds require massive exits to move the needle
VCs have multiple mechanisms to block exits that would otherwise be good for Founders
Mis-alignment of goals and time horizons
Venture-backed companies average 6-8 years from VC financing to M&A exit
After founders shares have already vested, equity effect becomes a drag on momentum, motivation
Relatively few founders are still at the helm at the time of an IPO or mega-acquisition
Question:
Are you working for your benefit, or your VCs?
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LEAN STARTUPS + EARLY EXITS
A match made in Heaven
Interesting fact:
Small, quick exits can be bigger wins for Founders than exits from VC-backed startups.
LeanStartups
EarlyExits
Two Great Tastes thatTaste Great Together
+ =
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CHAPTER II: TIMINGaka, why this matters to you, right now
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A FORK IN THE ROAD
Are you an Entrepreneur or an Empire Builder?
Short Version:
Reducing Time to Exit = Reducing Risk + Enhancing IRR
StartCo.
RaiseAngel
Prove
BusinessModel
AchieveProduct /Market Fit
Social Proof:Traction,
Momentum
Exit @ $25Mw/65% Equity
RaiseSeries A,own 40%
RaiseSeries B,own 25%
RaiseMezz,
own 15%
IPO or Acq.@ $150M
w/15% Equity
2 - 3 Years 6 - 8 Years
Risk Level (Probability of Failure)
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WHEN TO START THINKING EXIT?
...much sooner than you think.
From The Entrepreneurs Perspective:
When the market is frothy (aka get while the gettins good-- e.g. AdMob, Playdom)
When there are clouds on the horizon (sell before it storms-- e.g. Flip Video Camera)
When big firms are hurting-- i.e. they missed the boat, and need you bad(e.g. Mint.com)
Before raising another round (the more VC rounds you take, the more unnatural acts youneed to perform to deliver an acceptable ROI)
From The Acquirers Perspective:
When there is a strong management team (particularly product & engineering)
When there is a big idea or new, new thing that will excite shareholders
When the business model has been at least partially proven (ARPU > CPU)
Before valuations get too high (thus requiring Board approval)
Perfect Storm:
Big Idea + Momentum + Distribution + Capital = Win / Win (startup) (startup) (large co.) (large co.) (both)
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IDEAL TIME TO START EXIT PLANNING
...is when you have:
Net-Net:
This perfect storm is often achieved in as little as two years.
MomentumThought Leadership in New SpaceMagnetism- $$, Employees, Press
Aura of Something New
ProofTraction (MAU, PVs, Time, Retention)
Positive Growth MetricsBus. Model (ARPU > CPA)
NeedBy Users
By PartnersBy Large Co.s
The best time to sell is when
the business model is proven,
growth is on an upwardly-
sloping trend, and acquirers
desperately need you.
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SMALL EXITS ARE THE NORM, ACTUALLY
Though mega-acquisitions get the press attention
Net-Net:
In most cases, even a $10M exit has a life-changing impact on founders
Tar et Ac uirer Amount est.
Serious Business Z n a $30M
Scout Labs Lithium $25M
Adsca e Goo le $23M
Blo er Goo le $20M
Odd ost Yahoo $20MPicasa Goo le $5M
Live ournal Ask.com $25M
Flickr Yahoo $30M
del.icio.us Yahoo $30M
Weblo s AOL $25M
Kaboose Disne Online $18M
Summize Twitter $15M
SocialThin AOL $10M
Fox Tunes Yahoo $40M
Aardvark Goo le $50M
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CHAPTER III: GETTING TO EXITaka, selling startups for fun and profit
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WHAT IS EXIT STRATEGY?
...a vision, a process, a philosophy...and more.
Strategy
Anticipating Large Co. needs + skating to where the puck will be (e.g. AdMob, YouTube)
Picking the right targets to dialogue with (the art of wrapping yourself around a potential acquirers axle)
Positioning Telling a good story + Illuminating Strategic Value / Fit
Selling the future potential and other intangibles-- what could be
Negotiation
Nuances of the dialogue-- e.g., hard vs. soft-sell, determining where the acquirer is flexible, etc.
Framing deal terms & options in a mutually beneficial manner
Closing the deal efficiently and effectively
Process:
Strategy Selection Positioning Pitch Negotiation Execution! ! ! ! !
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DOING THE DEAL
Key success factors for getting what you want
Exiting is a Process
Most of the time, companies are sold, not bought
Optimum exits require an active sales process
Time Is (Generally) Not Your Friend Deals can unravel if they drag on too long (cold feet phenomena)
Every step should have a deadline (real or created)
Friction Is The Enemy
Establish trust early (but verify) + open communication flows
Clean the house before visitors arrive (IP ownership, cap table, audits, term sheet issues, investors expectations)
Goldilocks Strategy for bringing in attorneys-- not too early, but not too late
Heat Formula:Acquirer need/desire X # of bidders at the table = Speed & Terms of the Deal
(price, cash/stock, earnouts, etc.)
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DOING THE DEAL PT. II
More tips and best practices
Start Thinking & Planning Exit Strategy Early
Most entrepreneurs wait too long; instead make the end game part of your overall operating strategy
Dont Get Greedy
Holding out for all increases the risk of getting none (aka pigs get fat, hogs get slaughtered)
Pay Attention to Investor / Entrepreneur Alignment
Get written sign-off on your Exit Strategy
Negotiate Tough, But Fair
A friendly acquisition is a good thing (you may be working for the acquirer when the dust settles)
Get Help
Someone who thinks about this stuff 365 days/year
Someone who can help you put forth cogent valuation arguments
Someone who can bring an impartial lens (the CEO is often too close to the deal)
In A Nutshell:
Strategy + Process + Help + Heat = A Successful Exit
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CHAPTER IV: VA EXIT TEAMaka, who the hell are you guys,and what can you do for me?
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VALUE ADD
Keys to a successful engagementSelecting a dedicated partnerand teammate is key:
Formulates a cogent strategydesigned to maximize value
Introduces a process-drivenapproach to ensure the deal runssmoothly
Reduces the burden on companymanagement (so you can focus onkeeping the business growing)
Increases credibility and levels theplaying field with acquirers
Generates momentum and heaton a deal
Develop
an appropriateexit strategy Position the
companyoptimally
Assist with
generating warmintroductions
Actively managethe entire process& get heat on
the deal
Leverage
managementtime & resources
and help closeResearch and
source rightpartners or
acquirers
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EXIT STRATEGY AS PROCESSEngagement mechanics & value delivered
The Process In A Nutshell:
Develop a plan
Confirm alignment (founders,investors, Board)
Build exit team
Clean up corp. structure
Prep for due diligence
Prepare deal / pitch materials
Build the Target list
Initial Target screening
Management meetings
Manage the auction
Negotiate and close
Net-Net:
A well-designed process significantly increases the probability of success.
By doing this:
Illuminate strategic value in Pitch
Provide support for deal terms & valuation
Expand the network of potential acquirers
Plan and coordinate process + scheduling
Run outreach in parallel, not serial manner
We deliver this:
Protect CEO
Offload management burden
Reduce the time to close
Improve odds of success
Maximize price and terms
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ABOUT US
...we really, really like tech startups.
Short Version:
We Speak Startup + We Speak Deal
Nathan has been advising startups on strategy, finance, businessdevelopment and venture / exit issues for over ten years. He
has worked with more than 100 companies across a broad
range of industries-- from software, SaaS, and social media, tomobile, entertainment, and consumer products. !He has also served in interim Corporate / Business
Development and CFO roles, and helped several firms developkey strategic partnerships with F500 firms. Nathan is currently
on the Advisory Board of four startups and has been co-founder in two technology firms. !Previously, he worked in investment banking for JP Morgan,
Access Ventures, and Piper Jaffrey. He has been involved inthree technology IPOs and nearly 40 acquisitions, in addition tonumerous private investments and joint ventures. !Nathan has a BSC from Santa Clara University and an MBAfrom the University of Texas at Austin. He is also a Chartered
Financial Analyst (CFA).!
Greg started his career as a technology, investment
banker at Hambrecht & Quist. As a versatile softwareindustry veteran, he has over fifteen years of experience
working with both enterprise and consumer-focusedcompanies. !Greg has also held various business development, partner
management and product development roles at thefollowing firms: Excite@Home, Gap Online, Macromedia,
Niku, Pacific Bell and Wells Fargo.!Additionally, Greg has provided partnership advice andcounsel to numerous web-based software and online
ventures focused on delivering services and solutions over
the web.!Greg graduated from the Wharton School at the
University of Pennsylvania, with a BS in Economics and a
concentration in Decision Sciences.!
Nathan Beckord, MBA CFA! Greg Robin!
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OUR BUSINESS MODELIts pretty simple, actually.
Our business model: work fees (retainer) + success fees (paid upon deal close).
Three flavors of service:
Exit Coach: Provide on-demand advice, strategy and coaching as you progress down the path withpotential aquirers. Act as sounding board to help think through critical issues, tee up discussions, overcomeobjections, frame the pitch and get heat on a deal. Help support your Exit Team.
Advisor: Includes the coaching services described above, but also involves a more hand-on developmentrole where we help create the pitch materials, refine target lists, and provide modeling and valuationsupport; also periodically includes a!more forward-facing role when needed (e.g. participate in meetings).
Deal Lead: A fully-engaged role where we work closely with management from beginning to end.Includes the above, plus active target sourcing and outreach, communications management, due diligence
process support, negotiation and closing assistance.
Deal StrategyPitch &
ValuationOutreach &Negotiation
Coach
Advisor
Deal Lead
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GIVE US A CALL
Lets talk about your Exit.
Nathan Beckord, CFAPrincipal
415-370-5060
Gregory RobinPrincipal
415-425-5374
http://www.venturearchetypes.com/Deal-Accelerator.html
twitter: @startupventures
We look forward to working with you.
VentureArchetypes Deal Accelerator
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CLOSING COMMENTS
Lets talk about your Exit.
We look forward to working with you.
Today, the optimum financial strategy formost technology entrepreneurs is to
raise money from angels and plan anearly exit to a large company in just afew years for under $30 million.
-Basil Peters
(Basil is author of the bookEarly Exits and we consider him one of the definitive thoughtleaders on the topic. A significant portion of this deck was directly influenced or inspired byBasils work. You can learn more about him by going to BasilPeters.com or AngelBlog.net. )