New Year’s Resolution: Think Out of the Standard Exit Box!

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“As software eats the world, non tech corporations are eating start ups.” What does that mean for your company’s exit opportunities?

By Adam Quinton (Founder & CEO, Lucas point Ventures)

New Year Resolution: I am going to try and be more lateral in 2014 when it comes to thinking about exits with the companies I am invested in and advising. So thinking out of the standard exit box!

The Thesis

From pretty much day one startups that raise money from “strangers” (ie non Friends and Family investors, so people who want their money back ++) they need to be focused on “exit”. (Well, Friends and Family want their money back too, they might not be quit so focused on it however!)

I find the way CEOs/Founder think about exit opportunities to be pretty informative. First with +/- 200 or so IPOs across the US each year (in all sectors) vs. about 60,000 Angel and 3,000 VC financings, monetization through an IPO is really pretty unlikely. The realist thinks M&A. Second looking into the future for potential buyers means looking at the present from a market landscape point of view.

Having a good handle on exits is important of itself, but it also tells me how thoughtful the entrepreneur is about her/his competitive environment. And crucially who has a product gap that their business might address, ie fit in to/add value to. This perspective can and should also drive strategic decisions too. Simply put, with the M&A exit in mind startups need to think “acquirer value” not “shareholder value” — what maximizes the value of the entity as seen from the perspective of a potential acquirer? In the tech space the current industry giants have been the dominant M&A players but increasingly there are opportunities for more creative “non standard” routes to exit.

An interesting recent post highlighted that an increasingly broad range of companies is acquiring tech start ups. In her Techcrunch article Lena Rao argues that “As software eats the world, non tech corporations are eating start ups“. She makes a key point that I think founders and investors should take note of. (For the record the top five acquirers in 2012 were Facebook, Google, Groupon, Twitter and Cisco.)

Lena provides several big data related examples. And of course mobile will continue to be a key area. A recent example – Snapette. I caught up with Sarah Paiji Co-Founder and CEO of NYC based Snapette recently and she was pleased to have closed the sale of her company to PriceGrabber in August. Snapette is a mobile app and in its own words is: “the perfect shopping tool to help you find designer fashion currently in stores near you”. Acquirer PriceGrabber is a leader in online shopping discovery/ecommerce with 26 million uniques driving over $1bn in annual retail sales for its partners. BUT like many established players in most any business, even online in this case, it was lagging in mobile. So Snapette addressed that gap making the point that its not just about the big players but companies in your ecosystem for whom you provide a solution to a pressing strategic problem.

Non standard might include financial buyers. In talking about this topic with Cynthia Schames we agreed that the majority of Private Equity (PE) acquisitions are of more mature businesses with assets and cash flow that can support leverage. Still there are some that focus on the tech space. The most significant recent example by far is Silver Lake Partners who played a key role in the Dell going private transaction. For those not familiar with them, take a look at Silverlake’s portfolio. Can’t recall anyone having them on an Exit table, but they have big fire power for later-stage acquisitions.

So a useful year end entrepreneur exercise might be to: 

  • List all the obvious buyers for your company and then
  • Brainstorm some non obvious ones too!

The Execution: Getting it Done

Never mind posts, whole books are needed to cover the nuances of getting to and managing exits in practice. However a recently exited entrepreneur just gave me this great one paragraph summary based on their experience:

… it’s all about relationships – doing an acquisition is even more of a marriage than hiring an employee, and people need to trust the people they’re allying themselves with and investing in. So I would say to cultivate these relationships early, build trust, get insights into how your product can help these potential acquirers, and possibly even do strategic partnerships with them earlier than anticipated (when it makes sense).

And if you do want to read “The Book” on the subject then, as David Rose pointed out to me, you need to add Early Exits by Basil Peters to you holiday gift wish list.

This post originally appeared on A2A: Analyst to Angel

adam quinton1About the blogger: Adam Quinton is Founder/CEO of Lucas point Ventures and an active investor in and advisor to early-stage companies. He is a member of the Global Advisory Board for Astia, a Founding Angel at Astia Angel. He is also an Advisor for Topstone Angels. He serves as a Mentor for 37 Angels, accelfoods and Women Innovate Mobile.