Exit Strategy
When I meet an entrepreneur for the first time I like having a conversation about the idea or see the product (or prototype) in action or even a “chalk talk” for those of us that are more visually inclined.
I’m generally not a fan of slides, especially if it’s an early stage company.
But if the founder wants to use slides then I usually go along. Founders should use whatever tools they feel most comfortable.
The one thing I am allergic to is when a founder includes a slide that says “Exit Strategy” and then has a few bullets that says “IPO or sell company to company a, b or c.”
Oy.
An early stage company should be thinking about how to create something great and how they want to get there. How to build value. Not think about exits.
Now most VCs that I know feel the same way about that dreaded slide. But there is a topic where I’ve seen disagreement amongst successful VCs related to the concept of exits when considering an early stage investment. Some VCs will think about who might be the potential buyers of the company.
They do this analysis upfront because most companies never go public. So they want to know if there could be multiple buyers of a company someday. If there aren’t any potential buyers then they it might impact the VCs decision.
I don’t see the world that way.
If you build a great company then you don’t have to worry about exits because you will have many options (e.g. public, get profitable & stay private, secondary offering, sell the company).
I believe there have been many exits where the actual buyer wouldn’t have been on any list at the time the initial venture investment.
This is just speculation on my part but at the time of the initial investment in the following companies who would have guessed the ultimate buyer:
-Flip Video (Cisco)
-Danger Research (Microsoft)
-Sling (Echostar)
The list goes on.
Yes, you can imagine the strategic rationale for those deals. But not on day 1 of the venture investment. The world just moves too fast to try and predict this stuff. And it’s not the most important question anyway.
We would all agree, the real question is whether a particular team & product can make something special.
Rafer sez:
I want to hear about liquidity early, but the median deal size and half-life of the deals I’m involved in is much, much smaller/shorter than yours.Your list of acquirers is a pleasant surprise for exactly that reason. Great startups of (from your model’s perspective) decent scale jump on large, nascent markets before incumbents can. The incumbents slowly adopt the market perspective of the best startups during the startups’ period of most aggressive growth. When those market perspectives are most convincing and the incumbents have to change their market participation significantly, the incumbents acquire those influential startups.
gbattle sez:
Rafer, it appears you’re suggesting the so called “exit strategy” discussion moot as it has much more to do with incumbents and their relative inflection points than anything an early stage company can project. In other words, until the IPO markets opens up, it is a buyer’s market, where the incumbent buyer is determined most by the timing of a startup’s ability to create value in nascent markets and the incumbent’s recognition of that “synergistic” (hate that word) value. Under this scenario (with a tip of the hat to Bijan’s insight), the possible acquisition pairings aren’t deterministic, so the startup should focus on building its nascent market while remaining liquid until the incumbents sort out the dynamics of need, timing, opportunity and price.
