Exit mode: Know when it's time to sell your startup
'Gonna search for big money stacks... Top tens or platinum plaques. Ain't got no need for a chain on my chaps." -- Dizzee Rascal
In conversations I've had with investors and founders in Dublin, New York and Los Angeles over the last two weeks, one thing remains clear: at this point nobody has any idea whether we are in a tech bubble or not.
Here's a quick summary of the landscape:
1 There's much more early stage money available than ever before. (Angel List, take a bow.)
2 'Series A' funding remains hard to secure. This is partially as the performance bar continues to get higher and partially because it hasn't increased in line with early stage levels.
3 IPOs have generally been delayed by the availability of deep reserves of private growth capital. (There's also a hint of FOMO (Fear Of Missing Out).
Make of the above what you will.
However, where I am definitely concerned is that not enough people are talking about selling things.
Giving people money is relatively easy. Getting it back tends to be the tricky bit.
Yet, for all the VC-uttered rap references (an art form which, sensibly, focuses on ways of *getting* money) there's generally a lot less written about this part of the process.
If you read about the first generation of Silicon Valley investors (Warburg Pincus's Bill Janeway and others like him), they were always tremendously focused on exits. Each time they reached a company milestone, they'd assess whether it was the optimal time to realise value (which is code for 'let's sell the company').
Today, a lot of investing is done by people who haven't actually had many (or any) exits. I find this almost as dangerous as investors who haven't built companies before.
There are two general blind spots which I see among both investors and founders.
By far the biggest misnomer (and this isn't localised to technology or internet markets) is assuming that a company's value will continue to climb in a linear fashion.
Jason Lemkin's web post on the 'local maximum' theory of valuations for startups at different stages should be mandatory reading for everyone. His thesis is that sometimes there's a greater return on investment to be achieved earlier (for strategic reasons) rather than being valued as a more mature company ('multiples' basis).
Investors - you need to remember your job is to generate a return and sometimes that's not glorious.
Founders - you need to remember that this is your investor's job.
(Side-note: one of the reasons that 'Series A' investment is hard right now is that there is a concentrated set of investors who have seen multiple exits and have realistic views on pricing.)
The second mistake is to ignore macro market conditions. Your company may be doing well but what's happening to the actual market? What's happening to your customers?
I remember a senior executive in GameStop scratching his head and saying to me "our numbers keep going up but all the games publishers are going out of business. I don't understand how both of these things can continue to happen." They didn't for much longer.
In a sector which is itself new and growing, executing and waiting for the knock on the door is an option. In a market which is going through massive disruption, you may want to be a lot more proactive in seeking an exit.
Deliberately seeking an exit doesn't mean any kind of weakness.
I generally agree with the adage that companies are bought, not sold, but it doesn't mean you shouldn't have some marketing.
I am constantly shocked by the lack of market knowledge that many busy executives demonstrate.
Having bankers present a company to them which is a strategically good fit isn't weakness. It's utter common sense.
Finally, a quick note on picking investment bankers.
There are two types:
(i) those who need you to basically land a deal in their lap and will then shop it around and
(ii) those who know your space and can give you some new thinking.
Like investors and partners, investment bankers (or more accurately advisers) need to be enthused, hyped and generally made very excited by what you're doing. Don't treat them as company therapists.
Long before you ever get to appointing advisers, make sure you've already gotten to know the decision-makers in the various companies which might be buyers. This may or may not include the corporate development folks, depending on the company.
Relationships are almost always critical: I've rarely seen a deal happen without a pre-existing relationship in place.
Obviously, exit-planning must be balanced with everything else in the company. But schedule a strategic review of the company every couple of quarters.
It'll keep your inner rapper happy.