Start with the Exit in Mind !

Start with the Exit in Mind! - mini-con­fe­rence was an event for star­tup ent­repre­neurs, angel inves­tors, board mem­bers and advisors.

People pre­sen­ting at the event were:

  • Ris­to Rau­ta­kor­pi, Goril­la Capi­tal Mana­ge­ment - ope­ning and clo­sing presentations
  • Nat Bur­gess, Tech­strat - M&A Bootcamp
  • Jonat­han Ander­sin, Fon­dia - Legal con­si­de­ra­tions in M&A

Ope­ning and exit sta­tis­tics presentation

Nat Bur­gess presentation

Legal aspects of M&A presentation

Clo­sing presentation

Also here is link to Ris­to’s Lin­ke­din post about the com­mon “misconcep­tion” about the “exit thinking”.

Exit driven actions - first steps

Exit is somet­hing eve­ry foun­der and inves­tor “dreams” about. Exits hap­pen and good exits are results of long work.

Buil­ding an exit takes long time and here are some first steps for build exit - which you should start all­rea­dy today :

  • Know your com­pe­ti­tors and build a emai­ling list of major com­pe­ti­tors CEO’s, CFO’s, CTO’s and other rele­vant Cxx’s and directors
  • Inclu­de them in your frequent PR emai­lings (do not spam)
  • Celebra­te “publicly” your breakth­roughs (busi­ness, technology)
  • Try to be mar­ket opi­nion lea­der with whi­te papers, mar­ket research etc.
  • Be acti­ve and be pre­sent in poten­tial acqui­rer’s major market
  • Try to meet Cxx’s in industry events and cus­to­mer events
  • Go to meet Cxx’s of your poten­tial acquirer
  • Build co-ope­ra­tions and part­ners­hips with poten­tial acqui­rer in sales, mar­ke­ting, mar­ket research, tech­no­lo­gy etc. 

Buil­ding a exit is not a science- it is in most cases hard work for long period - and some luck 😉 

When is the best time to do the exit?

When the buyer is wil­ling to buy you at rea­so­nable terms. The most cri­tical ele­ment of this is the moti­va­tion of the buyer, and that is out of your cont­rol. The “open to buy” win­dow is crea­ted when their stra­te­gy shows a need they need to address and do it your­self doesn’t real­ly cut it. That’s when they start loo­king, and you need to make sure you show in their radar screen when they do. And that is the part which you CAN cont­rol. Some­ti­mes this hap­pens ear­lier than you would have liked, some­ti­mes later. Timing is not in your hands. Accept it, and act accordingly. 

You need to prepare for exit

Exit is somet­hing that foun­ders “pro­mi­se” for exter­nal inves­tors. To get to exit takes both time and loads of work. 

To “pre­pa­re and posi­tion” for exit takes typical­ly 3-5 years. All­rea­dy in day-1, you should have TBD. “exit dri­ven actions”-list.

Here is a article that have some advices for “exit dri­ven actions”

Do you not want companies to realise their full potential, beyond the early trade sale opportunity?

Abso­lu­te­ly we want eve­ry­one to reach as high as their abi­li­ties allow them to! A unicorn would be fan­tas­tic! A lot of what we say should be prece­ded with “until pro­ven otherwi­se”. As we belie­ve in data and sta­tis­tics, we assu­me the median type outco­me as the place­hol­der – UNTIL PRO­VEN OTHERWI­SE. I.e. once you have evi­dence that you can do bet­ter and reach hig­her than the typical/median case, then rai­se the bar! But you need to pro­ve you can walk until you try to run. And until you have pro­ven your abi­li­ty to run, you should stay on a rou­te whe­re run­ning is not mandatory. 

What do you mean with an “early stage trade sale”?

Tra­de sale = someo­ne big­ger than you buys your com­pa­ny out­right. For the buyer, your company/it’s busi­ness are a nice comple­men­ta­ry add-on to what they alrea­dy have (they have a brand, cus­to­mers, chan­nels, sales­people etc – but they have a cri­tical hole your com­pa­ny could fill)
Ear­ly Sta­ge = this refers to the sta­ge your busi­ness is at, not to the calen­dar age of the com­pa­ny. The sweet spot is that you have found (at least v1.0) of your product/market fit and demon­stra­ted suf­ficient proof of it wor­king in real life, but you have not yet built “real” busi­ness of it.
In essence, in an ear­ly sta­ge tra­de sale the sel­ler sells a reci­pe for growth for a buyer who belie­ves they can do the baking of that growth based on that recipe. 

What kind of an Exit is best for the Founder?

Depends on “what does success look like” for the Foun­der. But assu­ming the Foun­der acts ratio­nal­ly, i.e. wants to maxi­mize her financial reward vs the effort, risk and time, the “math” works as fol­lows:
What Foun­der gets in her poc­ket = Rea­li­sed Exit value (1) x Founder’s sha­re of the com­pa­ny at the time of an exit (2) x time it takes to get to an exit (3) x pro­ba­bi­li­ty of get­ting an exit (4)

Let’s con­si­der 2 sce­na­rios, A is an ear­ly sta­ge tra­de sale, B is a “glo­bal cate­go­ry win­ner”
On (1), A is defi­ni­te­ly smal­ler, B can be much hig­her
For (2), once you start aiming for a high level, you will need a lot of money, usual­ly in mul­tiple rounds, resul­ting in the Founder’s sta­ke dilu­ting to a frac­tion of what it was ini­tial­ly. A and B will have very dif­fe­rent values, A being bet­ter for the Founder.

On (3), beco­ming a glo­bal cham­pion is never cheap, easy or quick. You will expect this to take time, and in rea­li­ty it will take even lon­ger. Life goes by whi­le you fight for your star­tup. A and B have very dif­fe­rent values, A being bet­ter for the Foun­der.
On (4), the hig­her you aim, the har­der it beco­mes – if you are luc­ky to get to the finals of the Olym­pics, your com­pe­ti­tors have all wor­ked at least as hard as you and have sac­ri­ficed eve­ryt­hing to be able to be the best. The odds of win­ning are slim. A and B have very dif­fe­rent values, A being bet­ter for the Founder.

Do the math using the values you feel are right, and see what it looks like. Lite­ra­tu­re (busi­ness books writ­ten by ent­repre­neurs) gives very straight advice: take A! Example: Rand Fish­kin (Lost & Foun­der) could have sold his com­pa­ny fair­ly ear­ly for rough­ly 20M, and he would have poc­ke­ted at least 60% of that. He didn’t take it. Years, and many strongly dilu­ting fun­ding rounds later, his com­pa­ny is much big­ger. But the­re will never be an exit that would poc­ket him the 12M he once said no to. He regrets deeply and wants to sha­re this with fel­low foun­ders so that they would not make the same mistake.

What are typical exit valuations?

Plea­se note that what gets the media atten­tion are the odd excep­tions, not the median cases – as the median cases are boring. 
Many ent­repre­neurs dream about an exit - in rea­li­ty exits (any kind, even small) are rare and on ave­ra­ge much smal­ler than people usual­ly think.
Only a part of exits are disclo­sed (ie. amount beco­mes public, latest at buyer’s annual report) and as a rule, non-disclo­sed exits are smal­ler (typical­ly <10m€) than the disclo­sed ones. In Nor­dics a median for a disclo­sed exit for a tech­no­lo­gy com­pa­ny is 12-15m€ , for non-disclo­sed less than that. Typical US tech­no­lo­gy exit is esti­ma­ted to be around 5m$. 

Gorilla Capital Management Oy

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