“push to exit” startups: from investment to exit larry kubal – labrador ventures march 11,...

““Push to Exit”Push to Exit”Startups: From Investment to ExitStartups: From Investment to Exit

Larry Kubal – Labrador VenturesMarch 11, 2008

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Push to ExitPush to Exit

25 minutes, 25 slides on EXITology:25 minutes, 25 slides on EXITology:

Part 1: TheoreticalPart 1: Theoretical Where do exits fit into the liquidity cycle? Where do exits fit into the liquidity cycle? Past, present & future for exits.Past, present & future for exits.

Part 2:Part 2: TacticalTactical How to talk to VCs about an exit when pitching Series A. How to talk to VCs about an exit when pitching Series A. What implications does a Series B or C What implications does a Series B or C

have on my exit?have on my exit?

Part 3: Just-do-it!Part 3: Just-do-it! The “when, why and how” of exits.The “when, why and how” of exits.

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Liquidity Cycle Recovery ContinuesLiquidity Cycle Recovery Continues

Companyliquidityevents

VC / Angelinvestments

in companies

Companygrowth

LPinvestment

in VC

$29.8B in 2007, best since 2001

Up rounds exceeded down rounds for 16th consecutive quarter

2007 IPO and M&A strongest since 2000

$34.7B in 2007, best since 2001

AngelAngelShortcutShortcut

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20.3

10 9.7

26.4

20.5 22.3

52.9

2001 2002 2003 2004 2005 2006 2007

Exits Have Been Recovering Exits Have Been Recovering Since the Bubble BurstSince the Bubble Burst

$ (Billions)

Total raised through M&A and IPO 2001-2007

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What Does the Future Hold?

Despite the positive trends, time from initial investment to exit

is at an historic high of greater than 6 years!

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Current Math of Exits vs. Investments Current Math of Exits vs. Investments Looks BalancedLooks Balanced

2007 Value of M&A and IPO Exits = $53 Billion

If VC Ownership = 65% at exit

Results in $34.5 Billion in Distributions to LPs

Balances the Current Re-Investment of LPs into VC

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Significant Developments Flash Caution SignsSignificant Developments Flash Caution Signs

Credit crunchDepressed stock market

causing depressed currency for acquisitions

Acquirers adopt a “wait and see” attitude

Consolidation = fewer potential acquirers

Weak IPO environmentDepressed stock market

Recession

Microhoo?

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Uncertainty of Exit Markets CreatesUncertainty of Exit Markets CreatesQuestion Marks for Venture Returns Question Marks for Venture Returns

Market Market valuesvalues

Source: Morgan Stanley Dean Witter & Co., Labrador

RealismRealism

DisappointmentDisappointment

HypeHype

TimeTime

19991999

20002000

20012001

20022002 2003200320042004

GrowthGrowth

20052005

20062006

??20072007

20082008

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Push to ExitPush to Exit

25 minutes, 25 slides on EXITology:25 minutes, 25 slides on EXITology:

Part 1: TheoreticalPart 1: Theoretical Where do exits fit into the liquidity cycle? Where do exits fit into the liquidity cycle? Past, present & future for exits.Past, present & future for exits.

Part 2:Part 2: TacticalTactical How to talk to VCs about an exit when pitching Series A. How to talk to VCs about an exit when pitching Series A. What implications does a Series B or C What implications does a Series B or C

have on my exit?have on my exit?

Part 3: Just-do-it!Part 3: Just-do-it! The “when, why and how” of exits.The “when, why and how” of exits.

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Series A: What Series A: What NOTNOT to say to a VC to say to a VC

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Series A Exit TalkSeries A Exit Talk“Necessary but not Sufficient”“Necessary but not Sufficient”

“That’s how we get to $50 million in year 5 AND we plan to exit

either by being acquired or through an IPO.”

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Take the Next StepTake the Next Step“Who, What, Why, Where, and How”“Who, What, Why, Where, and How”

Who are the potential acquirers?

What are the valuation metrics?

Why would they want to acquire you?

Where do you fit into their strategic plans?

How does the execution of your business plan fulfill/maximize exit requirements/metrics?

(No IRR calculations, please.)

““Push to Exit”Push to Exit”

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Exit Implications: Series B and BeyondExit Implications: Series B and Beyond

“Mo Money, Mo Problems” – or at Least Higher Expectations

Dilution

New Investor Goals

Know why you are taking money: Water in the Desert (stay alive) Rocket Fuel (accelerate growth) Middle Ground (fund progress)

Know where you are and what the exit implications are.

EXAMPLE: $8M Series B at $12M Pre-money

40% Dilution – New investor wants 10X – Exit target now > $200 million

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Exit Implications: Strategic InvestorsExit Implications: Strategic Investors

Easy Money with Benefits (… but often with strings attached)

Control Issues

Limitations on Exit

“Strategic” Guidelines

Later better No board seat or control of a Series Balance Understand motivations and history Operating deals alone are possible

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Historically long time from investment to exit.

Demands heightened capital efficiency.

Exit Implications: Operations Exit Implications: Operations

Build the exit metrics [efficiently] while building the business [quickly].

Time = Money

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Push to ExitPush to Exit

25 minutes, 25 slides on EXITology:25 minutes, 25 slides on EXITology:

Part 1: TheoreticalPart 1: Theoretical Where do exits fit into the liquidity cycle? Where do exits fit into the liquidity cycle? Past, present & future for exits.Past, present & future for exits.

Part 2:Part 2: TacticalTactical How to talk to VCs about an exit when pitching Series A. How to talk to VCs about an exit when pitching Series A. What implications does a Series B or C What implications does a Series B or C

have on my exit?have on my exit?

Part 3: Just-do-it!Part 3: Just-do-it! The “when, why and how” of exits.The “when, why and how” of exits.

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When to Exit Why to ExitWhen to Exit Why to Exit

6-12 Months prior to growth plateau or decline due to:

Market – market share static in a stagnant market

Competitive – rise of significant competitors

Financial – risk/reward imbalance

Other

Negative - Forced

Investors are burnt out Management is burnt out

Positive - Choice

Opportunistic liquidity reward

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Define and Prioritize the Objectives of ExitingDefine and Prioritize the Objectives of Exiting

Speed – Timing

Valuation

Liquidity

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Types of ExitsTypes of Exits

M & A: 85-90% of venture-backed exits Cash sale (typically with 1+ year, 10-20% escrow)

Cash with earnout based on milestone metrics

Combination of cash & stock (public or private)

All stock

IPO: narrow window Profitable, $50 million revenue run rate, pattern of

predictability

Expensive, distracting, loss of corporate privacy

Typical 180 day lockup

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The Mind of an AcquirerThe Mind of an Acquirer

20 acquisitions per year. "We do deploy capital, but it's not for a return on capital. It's for alignment."

"Who can provide solutions to help us stimulate market conditions?

We need [start-ups] who can help us do things at a faster velocity."

7-10 acqusitions per year."The pipeline of opportunities is as high

as it's ever been, historically,"

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Maximizing Exit ValuationsMaximizing Exit Valuations

Fit: See yourself through your acquirers’ eyes.

Timing: Give yourself room.

Optionality: Create multiple alternatives.

Alignment: Synch up with all stakeholders

Negotiate from Strength

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Exit Execution: 4 RulesExit Execution: 4 Rules

1. Don’t flush value

2. Target intelligently

3. Don’t waste: capital & time efficiency

4. Align – Communicate – Don’t Stop

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Push to ExitPush to Exit

25 minutes, 25 slides on EXITology:25 minutes, 25 slides on EXITology:

Part 1: TheoreticalPart 1: Theoretical Where do exits fit into the liquidity cycle? Where do exits fit into the liquidity cycle? Past, present & future for exits.Past, present & future for exits.

Part 2:Part 2: TacticalTactical How to talk to VCs about an exit when pitching Series A. How to talk to VCs about an exit when pitching Series A. What implications does a Series B or C What implications does a Series B or C

have on my exit?have on my exit?

Part 3: Just-do-it!Part 3: Just-do-it! The “when, why and how” of exits.The “when, why and how” of exits.

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Four Takeaway ThoughtsFour Takeaway Thoughts

1. The exit environment has made steady progress, though there are cautionary “danger” signs emerging.

2. Investors as well as entrepreneurs, while engaged in building a business, need to keep an eye on an exit through decision making in all stages.

3. When pursuing an exit, decide early and make sure all stakeholders are aligned with freely flowing communication.

4. Maximize exit valuation by knowing your potential acquirers and maximizing exit options.

““Push to Exit”Push to Exit”Startups: From Investment to ExitStartups: From Investment to Exit

Larry Kubal – Labrador Ventureslkubal@labrador.com

www.labrador.com