EXIT STRATEGY FOR STARTUPS

VentureArchetypes, LLCStartup Advisory + Deal Support

CHAPTER I: CONTEXT

aka, “why this matters to you”

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 the

heavy 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.

WHY IT MAKES SENSE TO EXIT EARLYLower 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 VC’s?

LEAN STARTUPS + EARLY EXITSA match made in Heaven

Interesting fact: Small, quick exits can be bigger “wins” for Founders than exits from VC-backed startups.

Lean Startups

Early Exits

Two Great Tastes that Taste Great Together

+ =

CHAPTER II: TIMING

aka, “why this matters to you, right now”

A FORK IN THE ROADAre you an Entrepreneur or an Empire Builder?

Short Version:Reducing Time to Exit = Reducing Risk + Enhancing IRR

StartCo.

RaiseAngel

ProveBusinessModel

AchieveProduct /Market Fit

Social Proof:Traction,

Momentum

Exit @ $25M w/65% Equity

Raise Series A,own 40%

Raise Series B,own 25%

Raise Mezz,

own 15%

IPO or Acq.@ $150M

w/15% Equity

2 - 3 Years 6 - 8 Years

Risk Level (Probability of Failure)

WHEN TO START THINKING EXIT? ...much sooner than you think.

• From The Entrepreneur’s Perspective: – When the market is frothy (aka “get while the gettin’s 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’ you

need to perform to deliver an acceptable ROI)

• From The Acquirer’s 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)

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.

SMALL EXITS ARE THE NORM, ACTUALLYThough mega-acquisitions get the press attention

Net-Net: In most cases, even a $10M exit has a “life-changing” impact on founders

Target Acquirer Amount (est.)Serious Business Zynga $30M

Scout Labs Lithium $25MAdscape Google $23MBlogger Google $20MOddpost Yahoo $20M

Picasa Google $5MLiveJournal Ask.com $25M

Flickr Yahoo $30Mdel.icio.us Yahoo $30MWeblogs AOL $25MKaboose Disney Online $18MSummize Twitter $15M

SocialThing AOL $10MFoxyTunes Yahoo $40MAardvark Google $50M

CHAPTER III: GETTING TO EXIT

aka, “selling startups for fun and profit”

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 acquirer’s 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➙ ➙ ➙ ➙ ➙

DOING THE DEALKey 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.)

DOING THE DEAL PT. IIMore 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

• Don’t 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

CHAPTER IV: VA EXIT TEAM

aka, “who the hell are you guys, and what can you do for me?”

WHAT WE DOExit Strategy and Startup Acquisition Advisory

• Deal Strategy– Setting Exit Strategy within the context of operating, finance, and growth goals– Figuring out: Who? When? How? Why? (and 1,256 other little details)

• Positioning & Pitch– Honing your message + illuminating strategic value (aka “making them want you”)

• Packaging and Valuation – Offering Memorandum, Exec Sum, Pitch Book, Finance Models, Valuation Analysis, etc. -- the whole nine yards

• Process Management – Research target acquirers; Create and filter target buyer list; Initial introductions– Facilitate meetings + Generate Momentum + Manage Communications

• Execution– Getting “heat on a deal” (aka, creating an auction environment with multiple bidders) – Act as bad cop when needed (esp. if you will be working for the acquirer post-deal)– Negotiation, due diligence management, closing. Helping you pick out your Bentley.

Short Version:Reducing Management Burden + Increasing Deal Value

VALUE ADDKeys to a successful engagement

Selecting a dedicated partner and teammate is key:

– Formulates a cogent strategy designed to maximize value

– Introduces a process-driven approach to ensure the deal runs smoothly

– Reduces the burden on company management (so you can focus on keeping the business growing)

– Increases credibility and “levels the playing field” with acquirers

– Generates momentum and “heat” on a deal

Develop an appropriate exit strategy Position the

company optimally

Assist with generating warm introductions

Actively manage the entire process & get heat on the deal

Leverage management time & resources and help close

Research and source “right” partners 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

ABOUT US...we really, really like tech startups.

Short Version: We Speak Startup + We Speak Deal

Nathan has been advising startups on strategy, finance, business development 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, to mobile, entertainment, and consumer products. !

He has also served in interim Corporate / Business Development and CFO roles, and helped several firms develop key 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 in three technology IPOs and nearly 40 acquisitions, in addition to numerous private investments and joint ventures. !

Nathan has a BSC from Santa Clara University and an MBA from 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 software industry veteran, he has over fifteen years of experience working with both enterprise and consumer-focused companies. !

Greg has also held various business development, partner management and product development roles at the following firms: Excite@Home, Gap Online, Macromedia, Niku, Pacific Bell and Wells Fargo.!

Additionally, Greg has provided partnership advice and counsel 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!

OUR BUSINESS MODELIt’s 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 with potential aquirers. Act as sounding board to help think through critical issues, tee up discussions, overcome objections, 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 development role where we help create the pitch materials, refine target lists, and provide modeling and valuation support; 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 Strategy Pitch & Valuation

Outreach & Negotiation

Coach ✓

Advisor ✓ ✓

Deal Lead ✓ ✓ ✓

GIVE US A CALLLet’s talk about your Exit.

Nathan Beckord, CFA Principalnathan@venturearchetypes.com415-370-5060

Gregory Robin Principalgreg@venturearchetypes.com415-425-5374

http://www.venturearchetypes.com/Deal-Accelerator.htmltwitter: @startupventures

We look forward to working with you.

VentureArchetypes Deal Accelerator

CLOSING COMMENTSLet’s talk about your Exit.

We look forward to working with you.

“

”

Today, the optimum financial strategy for most technology entrepreneurs is to

raise money from angels and plan an early exit to a large company in just a

few years for under $30 million. -Basil Peters

(Basil is author of the book Early Exits and we consider him one of the definitive thought leaders on the topic. A significant portion of this deck was directly influenced or inspired by Basil’s work. You can learn more about him by going to BasilPeters.com or AngelBlog.net. )