Lean Startups and Early Exits -- Startup Exit Strategy Thought Piece

8/8/2019 Lean Startups and Early Exits -- Startup Exit Strategy Thought Piece

1/22

EXIT STRATEGY FOR STARTUPS

VentureArchetypes, LLC

Startup Advisory + Deal Support


2/22

CHAPTER I: CONTEXTaka, why this matters to you


3/22

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.


4/22

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?


5/22

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

+ =


6/22

CHAPTER II: TIMINGaka, why this matters to you, right now


7/22

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)


8/22

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)


9/22

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.


10/22

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


11/22

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! ! ! ! !


13/22

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.)


14/22

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


15/22

CHAPTER IV: VA EXIT TEAMaka, who the hell are you guys,and what can you do for me?


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17/22

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

1

2

3

4

5

6


18/22

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


19/22

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!


20/22

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


21/22

GIVE US A CALL

Lets talk about your Exit.

Nathan Beckord, CFAPrincipal

[email protected]

415-370-5060

Gregory RobinPrincipal

[email protected]

415-425-5374

http://www.venturearchetypes.com/Deal-Accelerator.html

twitter: @startupventures

We look forward to working with you.

VentureArchetypes Deal Accelerator


22/22

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. )

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Lean Startups and Early Exits -- Startup Exit Strategy Thought Piece