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your financial models, and your fundraising. Sign up with the link in the description. Almost every founder I talk to is thinking
about their “exit” from nearly the beginning. Angel investors frequently ask “what’s
your exit strategy?” And at the seed and Series A stages, often
founders talk about their exit strategy unprompted. I think that’s a mistake. Early on you should be focused on building
a big and impactful company and dominating your market. Do that and the right monetization event will
come along. But from the beginning, it’s important to
understand how exits work and what possible outcomes may look like. Most first-time founders don’t realize how,
when, and why common exit scenarios unfold. So let’s cover the primary ways an exit
can occur, why and when they occur, and how to maximize exit opportunity value for you,
your investors, and your team. Alright, we have a lot of ground to cover. I want to talk about acquisitions, how companies
are bought not sold, acqui-hires, IPO’s (or SPAC’s), exit dynamics when bootstrapped
versus venture-backed, some M&A deal terms to think about, and in acquisitions where
most buyers come from. Let’s start off with an important statistic
-- with venture-backed companies, for startups that reach some form of monetization event,
over 90% will be acquired and few will go public. So let’s start by digging into acquisitions,
how they work, and what to keep in mind. The first thing to know is the M&A mantra
that “companies are bought, not sold.” What does that mean? To maximize value for you, your team, and
investors, the best deal you are going to get is when an acquirer starts pursuing you
-- AKA you are being “bought.” They open up a dialogue along the lines of
“we’d love to talk to you about possibly acquiring your company.” The inverse of being “bought” is where
you go out to “sell” your company. If you are a startup that wants to hire a
banker and put a “process” together to “sell” your company, typically, you won’t
get nearly the premium. There is the blend if someone says they want
to acquire you and you decide to then “play the field” and see if you can get other
companies interested and get a bidding war going. If you can, that’s great as hopefully, you’ll
get better terms. But again, keep in mind that in the best case
startups are, for the most part, bought, not sold. The main time I see startups being “sold”
is where it’s some form of “fire sale,” things are not working out… and the startup
or investors are trying to recoop whatever cash they can and want to possibly find the
team a new home. So since we said the best type of acquisition
is when you are pursued, let’s talk about where these buyers come from. Where do you find them or where and how do
they find you? We see that in most cases when a startup gets
an acquisition offer, it comes from a company they already know and have some type of relationship
with. Maybe it’s a co-development partner, strategic
funding source, integration partner, channel, or distribution partner. Often, they’ve worked with you for quite
some time, see that you have something meaningful, and realize there is a more potential if they
own you. Sometimes you do get approached by someone
you’ve never met before -- it can happen. But it’s rare. What’s important to keep in mind if someone
is talking to you about an acquisition, is the deal dynamics will be different if you
bootstrapped versus taken a lot of outside funding. With a lot of outside funding in your company,
the more cash you take, the fewer exit options you’ll have. As you take in more investor cash, the “exit
hurdle” grows substantially. Think about it. If you take in $1m in outside funding, there
are hundreds of companies that could acquire you at an amount that would provide a great
return for the founders and investors. But as you take in $10m, $50m, $100m, or more,
there are fewer and fewer companies that can afford to acquire you and provide a return
that venture investors, and you, would find materially interesting and provide for a high
ROI on funds invested. As a founder, remember that if a VC puts money
into your startup, it’s because investors want to back the “next big thing” and
they want you to “go big or go home.” Let’s say you’ve raised $2m from outside
investors and for that, they own 20% of your company (so you are probably at a $10m-$12m
post-money valuation). Someone comes along and wants to buy you for
$10m. Let’s say you still own 30% of your startup
and you do very simple math (not remembering the exact terms of your deal) and think “awesome,
I could walk away with $3m.” But your investor is thinking “I just put
money in at that valuation… so I’m basically only getting my money back.” For most investors, that’s not interesting
as they’re typically looking to make 3x or more in the very high risk world of startup
investing. I’ve seen investors, on more than one occasion,
say “Look, I think you shouldn’t sell but instead keep going. Build the company and let’s make it into
something huge.” Remember, the more venture money you take
in, the more options you take off the table for an early exit that may be meaningful to
you, but not to others. Next up, I want to talk about a very common
type of exit that many don’t realize when it happens -- and that’s the “soft landing”,
“rescue” or “aqqui-hire” exit. When the startup has been going for some time
and usually after substantial investor funds have been consumed, but insufficient traction
and market penetration have occurred, frequently startups or investors will start looking for
a “soft landing” for the startup. This is for several reasons… The investors are looking to get at least
some cash back out of the startup… the investor and founders are trying to find a “home”
for their team so everyone has a job… and also everyone is trying to see if they can
somehow monetize the IP and customer base. When you read the news of a startup being
acquired, and you see the wording “terms not disclosed,” that’s often a tell that
a soft landing or aqui-hire has occurred. Usually not a great outcome. But look -- it’s part of being an entrepreneur
and startup investor. Sometimes deals and companies don’t work
out and you’re trying to get the best possible outcome for all. A final note about being acquired before we
talk about being a public company. If you get an acquisition offer, make sure
to surround yourself with a great team of trusted advisors -- your Board, investors,
law firm, accounting firm, and hopefully other trusted entrepreneurs who have been acquired. Structuring and hammering out a great deal
is not easy and is a team sport. Most entrepreneurs don’t have a lot of experience
in M&A deals and there are a ton of critical tricks and traps to navigating the due diligence
process, earnout agreements, deal structuring, price and consideration, tax consequences,
escrows, holdbacks, reps and warranties, and dozens of more issues. Do your homework! Also, if you are VC backed, suddenly your
cap table and the terms of your “capital stack” are going to come into sharp focus
as you figure out, with all of the preferences and rights, who exactly gets what. Bring your A team and A game to this process. Okay, now the final type of “startup exit”
to talk about is being a public company. Maybe you IPO, reverse merge into a public
shell or do a deal with a special purpose acquisition company or SPAC. Being a public company can be great as it
can, after a lock-up period, provide liquidity to founders, investors, and early hires who
have stock options. Being public does carry heavy administrative
and organizational costs and now you need to act a lot more “buttoned-up,”. As well, you can access very large pools of
capital to continue fueling your growth. One other great impact is from a branding
and marketing point of view. Being public adds a level of credibility to
your company and brand awareness. Again, exiting by going or being public happens
infrequently to startups as the M&A path is most likely. I hope you found this overview of how startup
exits work helpful. It’s good info to keep in the back of your
mind and hopefully you’ll get there one day. But remember, keep your eye on the prize -- building
a great company that dominates your industry. Do that and the right exit opportunities will
arise. I hope you liked this video and if you did,
please like and subscribe to the Slidebean and Dreamit Ventures YouTube channels. Thanks for watching!
