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Start-Up 100: Let’s talk about exits

Guest columnist and Start-Up 100 judge Alex van Someren dispels a few of the myths around selling your company


The IPO market is opening up again, enabling social networking companies such as Facebook to come to the markets

If you can’t imagine selling your business in a few years’ time, when it’s achieved a degree of success, then you probably shouldn’t be raising external finance in the first place. Very few institutional investors are interested in staying involved in the business long term, simply because their own investors want their money back, and an exit is the only way to realise their investment return.

Founders and investors are equally interested in getting paid back for what they’ve put into a business, whether it’s money or sweat. The ‘exit’ is where that starts to happen.

It’s important to understand that venture capitalists and other professional investors normally invest from contractually-established investment funds which typically have a built-in lifetime of ten years. This means that after raising the money from their own investors, the VC partners will typically spend the first five years of their fund’s lifetime investing it in companies like yours, and the next five years trying to release that money again through exits, either by listing the company on the stock markets via an IPO, or through a merger or acquisition.

In principle, the alternative to a trade sale is an IPO, but, for the last few years, investors haven’t been thinking about IPOs much because it’s been a while since the public markets have really been open to technology companies. As of early 2011, the IPO market looks to be opening up again, particularly for social networking companies, enabling Facebook and LinkedIn to come to the markets. Even so, be aware that IPOs are generally reserved for profitable companies with sales of approaching $100 million a year. That’s probably not you just yet.

For the entrepreneur, planning an exit is not as simple as putting a slide in your investor presentation which says something like: ‘Exit plan – Sell to a big company for a high price’, but, believe me, I still see this kind of thing all the time.

As an investor, I need you to start thinking about the route to an exit long before I decide whether or not to invest in your company. Mainly, I’m thinking specifically about which corporate players are likely to be interested in buying your business in a few years’ time, and how we’re going to make them want to do it. This is usually going to be driven very directly by the market disruption your business achieves. If you’re creating a new market opportunity which didn’t exist before, or taking market share from other incumbent companies, then you are well on your way to being the grain of sand which irritates long enough to become an oyster.

Strategic corporate partnerships are often the key to achieving this. If your business frightens the heck out of a big corporate player, or you can help to make them look good and directly improve their sales, then you’re probably going to find it a lot easier to get them to make you an offer you can’t refuse further down the line. Furthermore, a good partnership can often mean huge savings of time and money in developing the sales of your own product or service. Just think: wouldn’t it be great if somebody else’s sales force did the selling for you, even if it was at the expense of a chunk of your margin? Winning that kind of channel partnership can make your business an irresistible acquisition target almost overnight.

Having said all that, delivering a great exit is a bit like a Zen mediation exercise: you are most likely to achieve the outcome you are looking for precisely by not thinking about it. Managing your business so that it delivers a great solution to a real problem, acquires lots of happy customers and makes a lot of profitable sales is the right thing to do anyway, but it’s usually also the best way to get to a great (that is, a high value) exit in the longer term.

One last thing: remember that from an entrepreneur’s perspective, ‘exit’ is really the wrong word. In practice, if you’re lucky enough to realise the value of your business then you’re probably not going to be allowed to leave right away. You might get a big cheque, but if you’re a founder then the chances are have to stay around for a while, no matter whether it’s an IPO on a public stock exchange, or a trade sale to someone like Google.

You will have to be prepared to negotiate hard, close a great deal, and then still have to hang around for a year or more to make sure things work out for the buyer. You could be forgiven for asking why it’s called an exit at all, because the truth is: you don’t even get to leave.

Alex van Someren is a Partner in Amadeus Capital Partners’ Seed Fund.

Filed in: Technology News

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