EXIT STRATEGY FOR STARTUPS
Startup 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.)
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 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
Are you working for your beneﬁt, or your VC’s?
LEAN STARTUPS + EARLY EXITS
A match made in Heaven
Lean Early Two Great Tastes that
Startups Exits Taste Great Together
Small, quick exits can be bigger “wins” for Founders than exits from VC-backed startups.
CHAPTER II: TIMING
aka, “why this matters to you, right now”
A FORK IN THE ROAD
Are you an Entrepreneur or an Empire Builder?
Exit @ $25M IPO or Acq.
Prove w/65% Equity @ $150M
Raise Business w/15% Equity
Start Achieve Social Proof: Raise Raise Raise
Co. Product / Traction, Series A, Series B, Mezz,
Market Fit Momentum own 40% own 25% own 15%
2 - 3 Years 6 - 8 Years
Risk Level (Probability of Failure)
Reducing Time to Exit = Reducing Risk + Enhancing IRR
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)
Big Idea + Momentum + Distribution + Capital = Win / Win
(startup) (startup) (large co.) (large co.) (both)
IDEAL TIME TO START EXIT PLANNING
...is when you have:
The best time to sell is when
the business model is proven,
growth is on an upwardly- Momentum
sloping trend, and acquirers Thought Leadership in New Space
Magnetism- $$, Employees, Press
desperately need you. “Aura” of Something New
Traction (MAU, PVs, Time, Retention) By Users
Positive Growth Metrics By Partners
Bus. Model (ARPU > CPA) By Large Co.’s
This perfect storm is often achieved in as little as two years.
SMALL EXITS ARE THE NORM, ACTUALLY
Though mega-acquisitions get the press attention
Target Acquirer Amount (est.)
Serious Business Zynga $30M
Scout Labs Lithium $25M
Adscape Google $23M
Blogger Google $20M
Oddpost Yahoo $20M
Picasa Google $5M
LiveJournal Ask.com $25M
Flickr Yahoo $30M
del.icio.us Yahoo $30M
Weblogs AOL $25M
Kaboose Disney Online $18M
Summize Twitter $15M
SocialThing AOL $10M
FoxyTunes Yahoo $40M
Aardvark Google $50M
In most cases, even a $10M exit has a “life-changing” impact on founders
CHAPTER III: GETTING TO EXIT
aka, “selling startups for fun and proﬁt”
WHAT IS EXIT STRATEGY?
...a vision, a process, a philosophy...and more.
– 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”)
– Telling a good story + Illuminating Strategic Value / Fit
– Selling the future potential and other intangibles-- “what could be”
– 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
Strategy ! Selection ! Positioning ! Pitch ! Negotiation ! Execution
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
Acquirer need/desire X # of bidders at the table = Speed & Terms of the Deal
(price, cash/stock, earnouts, etc.)
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
• 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 DO
Exit 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
– 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.
Reducing Management Burden + Increasing Deal Value
Keys to a successful engagement
Selecting a dedicated partner
and teammate is key:
– Formulates a cogent strategy an appropriate
designed to maximize value 1 exit strategy Position the
– Introduces a process-driven
approach to ensure the deal runs Leverage
time & resources
and help close
– Reduces the burden on company Research and
management (so you can focus on source “right”
keeping the business growing) partners or
Actively manage acquirers
– Increases credibility and “levels the the entire process
playing ﬁeld” with acquirers & get heat on
the deal 4
– Generates momentum and “heat” introductions
on a deal
EXIT STRATEGY AS PROCESS
Engagement mechanics & value delivered
The Process In A Nutshell: By doing this:
✓ Develop a plan • Illuminate strategic value in Pitch
✓ Conﬁrm alignment (founders, • Provide support for deal terms & valuation
investors, Board) • Expand the network of potential acquirers
✓ Build exit team • Plan and coordinate process + scheduling
✓ Clean up corp. structure • Run outreach in parallel, not serial manner
✓ Prep for due diligence
We deliver this:
✓ Prepare deal / pitch materials
✓ Build the Target list • Protect CEO
✓ Initial Target screening • Ofﬂoad management burden
✓ Management meetings • Reduce the time to close
✓ Manage the auction • Improve odds of success
✓ Negotiate and close • Maximize price and terms
A well-designed process signiﬁcantly increases the probability of success.
...we really, really like tech startups.
Nathan Beckord, MBA CFA! Greg Robin!
Nathan has been advising startups on strategy, ﬁnance, business Greg started his career as a technology, investment
development and venture / exit issues for over ten years. He banker at Hambrecht & Quist. As a versatile software
has worked with more than 100 companies across a broad industry veteran, he has over ﬁfteen years of experience
range of industries-- from software, SaaS, and social media, to working with both enterprise and consumer-focused
mobile, entertainment, and consumer products. ! companies. !
He has also served in interim Corporate / Business Greg has also held various business development, partner
Development and CFO roles, and helped several ﬁrms develop
management and product development roles at the
key strategic partnerships with F500 ﬁrms. Nathan is currently
following ﬁrms: Excite@Home, Gap Online, Macromedia,
on the Advisory Board of four startups and has been co-
founder in two technology ﬁrms. ! Niku, Paciﬁc Bell and Wells Fargo.!
Previously, he worked in investment banking for JP Morgan, Additionally, Greg has provided partnership advice and
Access Ventures, and Piper Jaffrey. He has been involved in counsel to numerous web-based software and online
three technology IPOs and nearly 40 acquisitions, in addition to ventures focused on delivering services and solutions over
numerous private investments and joint ventures. ! the web.!
Nathan has a BSC from Santa Clara University and an MBA Greg graduated from the Wharton School at the
from the University of Texas at Austin. He is also a Chartered University of Pennsylvania, with a BS in Economics and a
Financial Analyst (CFA).! concentration in Decision Sciences.!
We Speak Startup + We Speak Deal
OUR BUSINESS MODEL
It’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.
Pitch & Outreach &
Advisor ✓ ✓
Deal Lead ✓ ✓ ✓
GIVE US A CALL
Let’s talk about your Exit.
Nathan Beckord, CFA
VentureArchetypes Deal Accelerator
We look forward to working with you.
Let’s talk about your Exit.
“ 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. )
We look forward to working with you.