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Lean Startups Early Exits: Startup Exit Strategy Thought Piece by VentureArchetypes

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					EXIT STRATEGY FOR STARTUPS




    VentureArchetypes, LLC
      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.)


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 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 VC’s?
LEAN STARTUPS + EARLY EXITS
                                                A match made in Heaven




                       +                             =

        Lean                          Early                 Two Great Tastes that
      Startups                        Exits                 Taste Great Together

Interesting fact:
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
        Angel      Model

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)



  Short Version:
           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)



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:
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




                                Proof                           Need
                    Traction (MAU, PVs, Time, Retention)         By Users
                           Positive Growth Metrics              By Partners
                         Bus. Model (ARPU > CPA)               By Large Co.’s




Net-Net:
      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

Net-Net:
  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.
 • 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 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.)
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

 • 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 ADD
                                          Keys to a successful engagement
Selecting a dedicated partner
                                                                          2
and teammate is key:
                                                         Develop
– Formulates a cogent strategy                           an appropriate
  designed to maximize value                     1       exit strategy        Position the
                                                                              company
                                                                              optimally
– Introduces a process-driven
                                                                                              3
  approach to ensure the deal runs          Leverage
  smoothly                                  management
                                            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
                                             6
– Increases credibility and “levels the          the entire process
  playing field” with acquirers                   & get heat on
                                                                    Assist with
                                                 the deal                                4
                                                                    generating warm
– Generates momentum and “heat”                                     introductions
  on a deal
                                                                5
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



Net-Net:
  A well-designed process significantly increases the probability of success.
ABOUT US
                                                         ...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.!


Short Version:
                                   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 &
                                          Deal Strategy
                                                                 Valuation         Negotiation
                          Coach                   ✓
                         Advisor                  ✓                  ✓

                       Deal Lead                  ✓                  ✓                   ✓
GIVE US A CALL
                                        Let’s talk about your Exit.

 Nathan Beckord, CFA
      Principal
      nathan@venturearchetypes.com
      415-370-5060

 Gregory Robin
      Principal
      greg@venturearchetypes.com
      415-425-5374
                                           VentureArchetypes Deal Accelerator


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




              We look forward to working with you.
CLOSING COMMENTS
                                                        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.

				
DOCUMENT INFO
Description: A new model is emerging in the tech startup world: build it cheap and lean, pivot until you hit product market fit, prove the business model works, and exit to a large acquirer (Google, Apple, Zynga, Facebook). This slide deck covers our thoughts on Startup Exit Strategy and Exit Planning for technology and web startups.