Key take aways from Exit Strategies for Entrepreneurs and Angel Investors

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