How to create an exit strategy for your business

Illuminated sign with French for "sortie".

I was recently invited to pitch my startup concept to a leading tech incubator based in London. Let me tell you, this was fish on bicycle territory for me. Pre-pitch and I tried on five different outfits (what do you wear at these super cool places?), practised some insouciance in front of the mirror, before heading off to ‘White Bear Yard’ in Clerkenwell. It could have been a humbling experience.  Rather than my anticipated presentation to a coterie of key decision makers across a calm boardroom table, I found myself squeezed between a ferocious game of ping pong and a poorly organised scooter rack, trying to explain my ‘not quite cutting edge enough’ concept, to someone born during John Major’s reign. Worse, his contorted facial expressions indicated, that he found my concept to be as attractive as spending six months in an international space station with NASA’s most flatulent astronaut. “We’ll call you …. “ was his only contribution …

But actually, I loved it. If business is the new rock n roll, then White Bear Yard is our Sun Studio – walls quivering with the energy of ideas and the expectation of an acquisitive approach from Google. So my thoughts returned to what I know best – corporate deals – and how a lean startup can achieve a high-value exit.

“Today, the optimum financial strategy for most technology entrepreneurs is to raise money from angels and plan an early exit to a large company in just a few years for under $30 million” – Basil Peters, Early Exits.

1. Why think about an exit now?

–          Exit planning at the start; drives the best value at the end

–          End game should be part of the investment pitch

–          Entrepreneurs are creators; not managers

–          M&A has become the new R&D

–          De-risk, de-risk, de-risk

2. Why lean is good

–          Much easier and cheaper to start and scale a company

–          Rapid prototype and testing, multiple pivots, avoid big business model

–          Lower risk, more return

–          Shorter time to (fail or) exit = the new opportunity

3. Acquisition strategies

–          For larger companies (UK and US) it’s about growth by acquisition

–          Acquirers have cash and intent

–          They don’t need all singing, all dancing model

–          They often require little more than signs of validation and momentum

4. Why entrepreneurs should focus on exit

–          Lean minimises the risk; exit gets rid of it completely

–          Founders value diminishes over time

–          Founders should be creating, not managing

–          Reducing time to exit = reducing risk and enhancing IRR

–          Minimise need for more investment rounds, dilution, longer term strategies of VCs

–          Start it, build it, sell it

5. What is an exit strategy?

–          A vision, process and philosophy

–          Anticipating and aligning start up with larger company strategy

–          Picking the right conversations (“wrapping yourself around an acquirers axle”)

–          Creating a great story + illuminating strategic value

–          Strategy, Selection, Positioning, Pitch, Negotiation, Execution

6. Timing

–          Always be ready for that knock on the door

–          Get that business model proven and growth upward

–          Create noise; generate press

–          Get strong management team in place

–          Align with a focus on who needs to buy

7. Doing a deal

–          Companies are sold, not bought

–          Optimum exits require an active sales process

–          Time kills deals; Move decisively as deals quickly fragment

–          Create milestones and deadlines in the sale process

–          Trust and communication are crucial

–          Get the house looking good (numbers, ownership issues, contracts, management)

–          Goldilocks strategy for advisors (not too early, not too late)

8. Risk of not thinking about these issues

–          Entrepreneurs often too focused on idea and growth; not on driving exit value

–          Ongoing management decisions are pivotal; poor foundations will impact on value

–          Don’t get greedy.  You’re unlikely to be the next Facebook.

–          Consider the ongoing risk and opportunity cost of not accepting that offer

–          Stay friendly with the acquirer – even if unsuccessful this time, they may knock again

This article is indebted to an excellent slide show created by Venture Archetypes.

They, in turn, were indebted to a chap called Basil Peters, author of Early Exits.

Proof indeed that little in life is truly original (only one song from the Stones debut album was penned by Jagger/Richards).

I’ll leave the pursuit of originality in the hands of those sexy startups at White Heat Yard.

More resources

Great Deck:  http://www.slideshare.net/VentureArchetypes/startup-exit-strategy-thought-piece-v76

Start Up Deals Platform:  www.exitround.com

The Guru:  www.basilpeters.com

Rolling Stones Debut Album:  http://bit.ly/a3VKGv