Exits are important as they help create this virtuous cycle. Since VCs and investors work to raise capital from their Limited Partners or LPs, an exit basically means that these LPs get their investments (potentially with a tidy profit) back. Moreover, it works as an instrument of market validation for these LPs and, also ensures sustainability and stability in the investment ecosystem.
In the startup world, there are a number of visionary landmarks to strive for. However, the specific end goal for start-ups is an exit strategy that benefits everybody involved – the founders, investors, employees, advisors, and customers.
However, before a venture/ company gets to this point, it is important to take a step back and understand the rationale. Exits are important as they help create this virtuous cycle. Since VCs and investors work to raise capital from their Limited Partners or LPs, an exit basically means that these LPs get their investments (potentially with a tidy profit) back. Moreover, it works as an instrument of market validation for these LPs and, also ensures sustainability and stability in the investment ecosystem.
As an entrepreneur, the primary focus is always on building and scaling the business in the midst of uncertainties and stress. Exit is never the priority. In addition, the abundance of cheap VC capital and the zeal to achieve Unicorn laurels have shaken the overall priorities, be it on the business fundamentals or Exit timings. What one fails to comprehend is that beyond a threshold; any excess cash raised comes at the cost of reduced exit probability. Despite that, it is heartening to see some healthy trends around profitable exits.
Exits are absolutely critical for the growth and health of the startup ecosystem, but also a must for VC backed startups.
Lots of anecdotes and data on exit momentum and performances are available, but seldom one gets to learn about the deal dynamics and the gigantic effort that goes behind the scenes. Having been involved in three global exits that include companies of high repute - ShieldSquare to Israel’s Radware (an acquisition), Incnut to Japan’s iStyle (a strategic secondary sale) and Little Eye Labs to USA’s Facebook (an acquisition), the learning on how global exits play out have been first hand. Based on my experience, here is an attempt to put a short-structured approach to the infrequent qualitative aspects that the key stakeholders should keep in mind while planning an exit via a strategic route.
Remember, companies are always bought and never sold.
Discovering (How to Build Global Awareness and Credibility)
One of the most effective ways for a start-up to gain attention is to get recognized as a leader in its category. The impact multiplies manifold if the recognition is garnered from credible and reliable third parties such as customers, partners, analysts, etc. Moreover, a presence and a strong demonstration of thought leadership at marquee events add to the credibility quotient
Another important aspect of building global awareness and credibility depends on how great the startup is at exploring partnerships at a global platform. It is true that a significant volume of strategic offers indeed come from existing or potential global partners (OEMs, SIs, and Marketing). Such partnerships, not only help in discovery but also in establishing a deeper understanding of the engagement dynamics and ROI thereby making the “Build Vs Buy” business cases simpler.
Deciding (When is the Right Time and Who is the Right Partner)
Unicorn or not, the most likely scenario for a start-up is an exit. So, what really determines the right time to take this major step?
The decision needs a careful assessment of market dynamics, other potential Exit options & their timings, and the incremental capital that a startup will need to scale Vs additional value that can be generated at scale. Remember; the goal always is to maximize shareholder value.
Partnering right is the key. This is the time to put your game theory concepts into action. Once the decision to Exit (whether opportunistic or planned) is taken, the key is in engaging effectively with multiple potential parties of high relevance. The objective should be to identify and conclude on the most optimal partner vis a vis complementarity / symbiotic potential, vision alignment and offer on the table.
Deliberate on (How to have a Bargaining Chip)
Identifying internal crusaders on either side ensures agility and smooth progress. Established trust and comfort between the Key Leaderships on both sides, goes a long way in efficiently managing this emotionally laden roller coaster ride.
Additionally, it is extremely common for such discussions and negotiations to drag on, thereby delaying the transaction closure. To weather such delays and always maintain a position of strength, a start-up either needs to be profitable or have enough capital in the bank. Cash-strapped businesses cannot(without exhibiting desperation) withstand the pressure and cycles.
While moving towards closure, it is essential to ensure that the business continues to have focus and attention and does not lose momentum or attraction during the protracted process of negotiation. This is absolutely critical in retaining the interest of the Strategic Partners while ensuring the transaction’s swift progress.
Deal-On (Ensure Timely Closures)
The entrepreneur’s time is precious. Hence, it is critical to ensure that the Company is ready mentally and physically. Even though Exits take a lot of bandwidth the business should continue to focus and not slow down or dampen in any way. There should be the agility to move through the paperwork and documentation completeness to withstand processes of rigorous due diligence cycles before it takes the final plunge.
Remember, both are on the same side of the table and it is definitely a team effort that involves the founders, investors and all stakeholders. Speaking with one voice wins all propositions. Timely internal communication and alignment help in avoiding delays and distractions.
Keeping good company and pro-active thought process matters. This involves engaging with investors who are aligned with the vision, having a circle of entrepreneurs who are dependable, and other stakeholders with relevant corporate mindset & experiences.
The intent of this article is not to push entrepreneurs to don Exit hat from day one, but to encourage pre-emptive thinking and highlight crucial tenets that can steer startups/entrepreneurs towards satisfying and seamless exits. At Endiya, we look for committed entrepreneurial teams with an ability to build scalable businesses driven by large market opportunities. And we firmly believe that a strong vision backed by focused execution is the most vital ingredient for any value realization.