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”

https://medium.com/the-mission/how-startup-founders-can-prepare-for-an-acquisition-524dc8fbafea

Should I plan to be a unicorn (like everybody else, and what many advisors are pushing me to do)?

(People who have alrea­dy done seve­ral exits at tens of mil­lions – you can skip this part)

If you want to make an infor­med deci­sion you should unders­tand the odds – some basic sta­tis­tical math. What mat­ters are not paper valua­tions on which money has been rai­sed, but rea­li­sed exits whe­re foun­ders and inves­tors recei­ved money back. So lets look at some exit facts:

  • Median exit value in tech­no­lo­gy com­pa­nies in Nor­dics hovers around 12-15m€ (disclo­sed exits - public com­pa­nies have to disclo­se mate­rial tran­sac­tions, so lar­ger deals tend to be disclo­sed). The­re is a lar­ge num­ber of non-disclo­sed exits that are typical­ly less than this.
  • In the who­le of Euro­pe the­re are only a few >250m€ tech­no­lo­gy exists eve­ry year (half a dozen or so).
  • Trying to build a unicorn takes a lot of time (>10 years) and mul­tiple invest­ment rounds, resul­ting in big chan­ges on cap table. Mar­kets chan­ge, people chan­ge, pre­fe­rences chan­ge, tech­no­lo­gies chan­ge…
  • The­re are hundreds of com­pa­nies who have rai­sed money at Unicorn valua­tions, but only a few which have been bought (or IPO’d) at Unicorn level
  • Your odds of get­ting a Unicorn exit are much MUCH lower than your odds of hit­ting a hole in one in golf (regard­less of your HCP)
    By all means dream big and set the tar­get high, but learn to walk befo­re trying to run. How about being worth 10M first, and then deci­ding whet­her you want to rai­se the bar or not.

You don’t need to be unicorn to be a success

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$.