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Early Exits[/caption]
Key advice for Startups and emerging companies
- Start small
- Stay lean
- Raise only the funding you really need and grow judiciously.
- Alignment from all parties on exit strategy is extremely important
- Best time to sell a company is when the future has never looked brighter
On VCs
- Interest of VCs might not be aligned with interest of founders and angel investors
- VCs need to satisfy the needs of their LPs
Need their successful companies to generate a minimum of 10-30X return for their fund to perform respectably, taking into account overall failure rates
- They thus need to wait longer to exit and work their investments harder.
- They are ok to accelerate the growth of their investments with their capital or blow it up quick for a capital right off. The latter helps minimize management overheads.
- They will block a sale if the return multiples do not meet their expectation
- VC return multiples of term sheet valuation
Series A - 10X return
- Series B - 4-7X returns
- SEries C - 2-4X returns
- VC funds have been getting bigger overtime. The need to deploy their capital forces them to seek for opportunities where likelihoods are slim.
- Companies with VC money tend to exit at year 16 on the average
On Angels
- Invest much less money than VCs
USD10,000 to USD250,000
- Happy to exit in a few years with a 3-5X return
- In the 50s and 60s
- prior successful entrepreneurs or senior executives
- allocate around 5-10% for angel investing
- has experience and inclination to be great mentors and valuable directors
- Companies with angel only money tend to exit at year 4 on the average
Drivers of acquisition
- trend has been dramatic shift towards earlier exits
- huge amounts of cash on balance sheets of large corporation
- growth in Private equity and buy out funds
Insights on Growth
- The first USD10 to USD20 million valuation are the easiest and less challenge on the skills of the CEO
It is easy for young companies to maintain year on year compound annual growth rates of 100% or even 200%
- Knowledge of how hard it is to be a CEO and lots of money in the bank is usually a huge deterrent for serial entrepreneurship.
- VCs replace CEOs of 75% of companies within 18 months of their initial investments
Founder's shares get trapped in an illiquid private company for another 5-10 years
- Use a 2 year time horizon
year 1 develop technology
- year 2 develop distribution
On valuation
- A lot of factors that have the biggest impact on a company's short term value fluctuation will be out of management's control
- The factors will also be unforeseen
- General valuation multiples
SAAS companies are typically valued at 3-4 RR
- Service body shops 0.5 of per staff revenue or PE ratio of 3-4
On sales process
- Typically 4-5 months
- CEOs must focus on the business to ensure metrics are at their best during the sales to maximize valuation
can add up to 10-20% more valuation
- Until the very last phase of the sales, it is best to delegate the sales process to a professional
Business broker or M&A advisor - use them as the bad guy
big firms shoot for exit above USD100million
2-3% of final value
- boutique firms shoot for USD20-70 million
4-6% of final exit value
Related references
- *Evolution and revolution as organizations grow,* Larry Greiner Harvard Business School
- *Raising money: The canadian guide to successful business financing*, Douglas Gray and Brian Nattrass
- *High Anxiety or Great Expectations*, Bart Schachter and George Hoyem, Venture Capital Journal