Download here - Labrador Ventures

“Push to Exit”
Startups: From Investment to Exit
Larry Kubal – Labrador Ventures
March 11, 2008
Push to Exit
25 minutes, 25 slides on EXITology:
Part 1: Theoretical
Where do exits fit into the liquidity cycle?
Past, present & future for exits.
Part 2: Tactical
How
to talk to VCs about an exit when pitching Series A.
What implications does a Series B or C have on my exit?
Part 3: Just-do-it!
The “when, why and how” of exits.
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2
LABRADOR
VENTURES
Liquidity Cycle Recovery Continues
VC / Angel
investments
in companies
 $34.7B in 2007,
best since 2001
LP
investment
in VC
Angel
Shortcut
Company
liquidity
events
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 $29.8B in 2007,
best since 2001
Company
growth
 Up rounds
exceeded down
rounds for 16th
consecutive
quarter
 2007 IPO and M&A
strongest since 2000
LABRADOR
VENTURES
Exits Have Been Recovering
Since the Bubble Burst
Total raised through M&A and IPO 2001-2007
52.9
$ (Billions)
26.4
20.5
20.3
2001
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9.7
2002
2003
2004
4
2005
22.3
2006
2007
LABRADOR
VENTURES
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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LABRADOR
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Current Math of Exits vs. Investments
Looks 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 Signs
Depressed stock market
causing depressed currency
for acquisitions
Credit crunch
Depressed stock market
Weak IPO environment
Recession
Acquirers adopt a
“wait and see” attitude
Microhoo?
Consolidation =
fewer potential acquirers
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Uncertainty of Exit Markets Creates
Question Marks for Venture Returns
Growth
2008
2007
2006
Disappointment
Market
values
?
Realism
Hype
2000
1999
2001
2005
2002 2003
2004
Time
Source: Morgan Stanley Dean Witter & Co., Labrador
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LABRADOR
VENTURES
Push to Exit
25 minutes, 25 slides on EXITology:
Part 1: Theoretical
Where do exits fit into the liquidity cycle?
Past, present & future for exits.
Part 2: Tactical
How
to talk to VCs about an exit when pitching Series A.
What implications does a Series B or C have on my exit?
Part 3: Just-do-it!
The “when, why and how” of exits.
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LABRADOR
VENTURES
Series A: What NOT to say to a VC
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Series A Exit Talk
“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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LABRADOR
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Take the Next Step
“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”
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LABRADOR
VENTURES
Exit Implications: Series B and Beyond
 “Mo Money, Mo Problems” – or at Least Higher Expectations
 Dilution
 New Investor Goals
EXAMPLE: $8M Series B at $12M Pre-money
40% Dilution – New investor wants 10X – Exit target now > $200 million
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.
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LABRADOR
VENTURES
Exit Implications: Strategic Investors
 Easy Money with Benefits
(… but often with strings attached)
 Control Issues
 Limitations on Exit
“Strategic” Guidelines





CONFIDENTIAL
Later better
No board seat or control of a Series
Balance
Understand motivations and history
Operating deals alone are possible
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LABRADOR
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Exit Implications: Operations
Time = Money
 Historically long time from investment to exit.
 Demands heightened capital efficiency.
Build the exit metrics [efficiently]
while building the business [quickly].
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LABRADOR
VENTURES
Push to Exit
25 minutes, 25 slides on EXITology:
Part 1: Theoretical
Where do exits fit into the liquidity cycle?
Past, present & future for exits.
Part 2: Tactical
How
to talk to VCs about an exit when pitching Series A.
What implications does a Series B or C have on my exit?
Part 3: Just-do-it!
The “when, why and how” of exits.
CONFIDENTIAL
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LABRADOR
VENTURES
When 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
Positive - Choice
Negative - Forced
 Opportunistic liquidity
reward
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 Investors are burnt out
 Management is burnt out
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Define and Prioritize the Objectives of Exiting
Speed –
Timing
Valuation
Liquidity
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Types 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 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 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 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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LABRADOR
VENTURES
Push to Exit
25 minutes, 25 slides on EXITology:
Part 1: Theoretical
Where do exits fit into the liquidity cycle?
Past, present & future for exits.
Part 2: Tactical
How
to talk to VCs about an exit when pitching Series A.
What implications does a Series B or C have on my exit?
Part 3: Just-do-it!
The “when, why and how” of exits.
CONFIDENTIAL
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LABRADOR
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Four 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.
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LABRADOR
VENTURES
“Push to Exit”
Startups: From Investment to Exit
Larry Kubal – Labrador Ventures
[email protected]
www.labrador.com