Exiting

What the greatest technology investors say about Exiting

EXIT–EXIT RETURNS-WHEN TO SELL POSTS (18 posts)

The following is a list of the post titles by author under this topic.  Scroll further down this page to find the actual blog post by your selected author.   Author’s posts appear in reverse alphabetical order except for the “Exit: What It Means” post which appears towards the beginning of the blog page.  For the others for example, following this list, Fred Wilson’s post appears towards the beginning of the blog page, and Jeffrey Bussgang’s post appears towards the end of the blog page.   

JEFFREY BUSSGANG (1 post)

Jeffrey Bussgang: Considerations when Determining an Exit

JOSH KOPELMAN (3 posts)

Josh Kopelman: The Unwritten Term on the Term Sheet

Josh Kopelman: Companies are Bought, not Sold

Josh Kopelman: High Valuations Can Limit Exit Opportunities

JASON MENDELSON (1 post)  

Jason Mendelson:  Investors Only Care about Two Things

BASIL PETERS  (8 posts)

Basil Peters: The Exit Strategy is the Most Important Business Plan Element

Basil Peters: Why VC's Block an Exit

Basil Peters: Angels Need a 20-25%/yr Return

Basil Peters:  When Can You Sell?

Basil Peters: How to Maximize the Selling Price

Basil Peters:  Strategic Value Increases Valuation

Basil Peters: How to Ensure There's Alignment on Exit Strategy

Basil Peters: A Fair Vesting Formula Optimizes Interest Alignment

MARK SUSTER  (3 posts)

Mark Suster: Fundraising Terms Pile Up with Later Stage Investors

Mark Suster:  VCs Want Big Outcomes & May Block a Sale

Mark Suster:  Mark Suster:  Angels Need Five Skills to Excel

FRED WILSON (1 post)

Fred Wilson: No One Gets More Diluted than the Founders

EXIT: WHAT IT MEANS  (1 post)

 

 

No One Gets More Diluted than the Founders

Fred Wilson venture capitalist  and Co-Founder Union Square Ventures

 Wilson discusses employee equity and dilution in technology and high growth businesses.   

“If anyone goes to the pay window, everyone goes to the pay window. [from [] Jeff Minch, [] JLM [] an active commenter on the avc blog].”

“[] If you [] sold [your company] for $100 million and you and your co-founders are gonna make a bunch of money [] you really ought to make sure that every single person who was involved in making that success happen makes a bunch of money too.”

“[] nobody will get more diluted than [the co-founders] because [the co-founders] are there at the very beginning and the dilution will happen over time.  And the person or the investor who shows up at the very end of the process might never get diluted.  The person who was there at the very beginning gets diluted the most.” 

“[] The sooner you can stop talking about equity in percentages and start talking about it in dollars is the sooner that you are going to own more of your company than you would otherwise.” Fred Wilson  April 19, 2012  MBA Mondays Live: Employee Equity - Archive and Feedback- video;

http://www.avc.com/a_vc/2012/04/mba-mondays-live-employee-equity-archive-and-feedback.html#disqus_thread

Mark Suster: Angels Need Five Skills to Excel

Mark Suster Partner Upfront Ventures and former entrepreneur

Suster identified “[] five skills [angel investors need to excel]”:

1.  “Access to the Best Deal Flow” []

2.  “Domain Knowledge

“[]Domain knowledge [] [is] [well-honed industry knowledge].” “[] It requires domain knowledge to know what you’re talking about and success long term as an angel. [] One of the biggest problems is when “you don’t know what you don’t know.””

3.  “Relationships with VCs

“[] Relationships with VCs [] protect [angel] investments” by taking out angels’ positions. 

4.   “Deep Pockets

A company is either acquired or has an IPO in an average 7-10 years.  Suster says that angels’ deep pockets providing follow-on investments minimize these risks:  dilution, inability to protect good investments and a lack of deal diversity.  “[] [Angels] need to be able to do a large enough number of investments to create enough deal diversity.”  The greater the deal diversity, the lower the risk. 

5. “Access to Buyers”

“[] the best investors influence their end-games through well-cultivated relationships with eventual buyers of their portfolio companies.” [] [Helping] companies exit to the right buyer and importantly at the right time” can be crucial.  Mark Suster, Angel Topics Sept. 14, 2010 http://www.bothsidesofthetable.com/angel-topics/

 

VCs Want Big Outcomes & May Block a Sale

Mark Suster Partner Upfront Ventures and former entrepreneur

“VCs want big outcomes.  [VCs] will demand a veto right over [a company sale].  [A founder] might be very happy selling [his] business for $9 million and owning 50% of the company.  [A] VC is not necessarily going to be happy getting $3 million for his 33% stake for which he invested $1 million.

[While that’s] a 3x return [] it’s still just $3 million and if the VC has a $300 million [fund] it is just 1% of the money [needed] to reach his “hurdle rate” of when he’s entitled to earn carry (e.g. big bucks).  It’s just too much time to spend [] for such a small total return.  Many VC’s would still let [a founder] sell []” but some would block the sale.  Mark Suster  Do You Really Even Need VC? July 22, 2009; http://www.bothsidesofthetable.com/2009/07/22/do-you-really-even-need-vc/

Fundraising Terms Pile Up with Later Stage Investors

Mark Suster Partner Upfront Ventures and former entrepreneur

“[] any [early stage terms] will certainly be asked for by future investors in [] later funding rounds so all of these terms pile up [after] 3-4 rounds of funding over a 5 year time frame. And by the time most companies get to an exit [which realistically is still 8-10 years,] often the founders own very little of the economic upside."  Mark Suster, Want to Know How VC’s Calculate Valuation Differently from Founders?  July 22, 2010

http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-valuation-differently-from-founders/

 

A Fair Vesting Formula Optimizes Interest Alignment

Basil Peters angel investor and Principal Strategic Exits Corporation

“Investors get 100% of their money back on the sale [of the company], so 50% vesting on the sale is fair and optimizes alignment [between entrepreneurs and investors].

[The] most fair vesting formula-  Assuming that was the fundamental agreement, and that 50% of the value is often created at the exit, then reverse vest: 50% of the shares [vesting] daily over  a three year period, and the other 50% when there is a ‘sale’ of the company.  

All vesting for senior employees accelerates on a sale of the company.”  Basil Peters, Maximizing Exit Value Angel Capital Association,  Annual Summit Workshop Apr. 15, 2009;  http://www.basilpeters.com/Presentations/Maximizing_Exit_Value_20090415_Part_2.pdf,  pg 30-31

How to Ensure There's Alignment on Exit Strategy

Basil Peters angel investor and Principal Strategic Exits Corporation

 “It’s surprising how often there is a misalignment between key stakeholders on the exit strategy. The only way to check is to get a ‘signoff’ on a written exit strategy. [] [Check] alignment annually. [] [The] right way to build a company is [to] determine the type of business, build alignment on the exit strategy, THEN develop the financing plan and then start to contact investors.”   Basil Peters, Maximizing Exit Value Angel Capital Assn Annual Summit Workshop Apr. 15, 2009, pg 28 & 32; 

http://www.basilpeters.com/Presentations/Maximizing_Exit_Value_20090415_Part_2.pdf

Strategic Value Increases Valuation

Basil Peters angel investor and Principal Strategic Exits Corporation

Illuminating strategic value of an acquisition target can increase valuation.  “The only reason any company buys another company is because [it believes it] can increase the value of the company being acquired, and/or the acquired company will increase [its own value]. [] The most successful company sales [result in] the combination of the two businesses increas[ing] the total business valuation faster than either company could achieve alone. []

[Strategic value increases business valuation by] reducing competition [] [and/or cross selling or promotion of] complementary products or services. [] [Also an acquirer] that would like to develop a similar product or service [] will [often] pay to reduce []‘time to market’, [] [so] being fast is often better than being good.”  Incremental strategic value can show why “the business is worth more to [the prospective buyer] than to another bidder”, which drives why he’ll often pay more.  Basil Peters,  Illuminating Strategic Value When You Sell a Business,  August 1, 2009; http://www.exits.com/blog/illuminating-strategic-value-when-you-sell-a-business/

How to Maximize the Selling Price

Basil Peters angel investor and Principal Strategic Exits Corporation

 “There are several ways to maximize the final selling price [exit value]: 1. Structural value increase  2. Illuminating strategic value 3. Capitalizing on Inefficient Markets  4. Maintaining multiple bidders 5. Sales and negotiating skill.    

Structural value increase often [] can increase the final selling price by 10 to 15% [and] can be balance sheet changes, asset vs. share sales [etc.]. 

Illuminating strategic value [] often creates the largest fundamental increase in selling price.  It’s not actually creating strategic value, it usually has to be there already. [It] very often has to be illuminated for the potential buyers [].

Capitalizing on inefficient markets.  Markets for selling a business, especially for under $100M are very inefficient:  Information is difficult to access, there are [few] buyers, the market is illiquid [and] often very few[are] for sale [] [which favors sellers]. 

Always have multiple bidders [] to improve the probability of closing [and] to maximize the price. [Three is optimal.] 

Selling and negotiating skill [] can increase the final price by 50% or more.

[] When the exit process is well planned and professionally executed[,]  the exit date and exit valuation are both reasonably predictable.”  Basil Peters, Maximizing Exit Value, Angel Capital Association Annual Summit Workshop Apr. 15, 2009;  http://www.basilpeters.com/Presentations/Maximizing_Exit_Value_20090415_Part_2.pdf-  pg 18-25

When Can You Sell?

Basil Peters angel investor and Principal Strategic Exits Corporation

“When can [one] sell? [] [With] M&A [merger & acquisition] exits [] the real threshold is to ‘prove the business model’. [To prove the model] [] a recurring revenue business [] [should show] actual results for: revenue per customer, gross margin per customer, customer lifetime (or churn [i.e., how long one enjoys that customer]) [and] cost of customer acquisition.  In other words, how much is a customer worth and what do[es] [a customer] cost to acquire?

[With that proven model], [] credible projection[s] [can be built] that [show] if: new owners added $X millions of capital, the business would have Y customers and be worth $Z millions.

That’s when [one] can sell [although] there are often additional factors like competitors and market changes. [] As soon as [one] prove[s] the model is often the best time to sell.  [It’s] always best to sell on an upward trend. Sell[ing] on the promise, not the reality [is] often when [one] [gets] the best price.”   Basil Peters, Maximizing Exit Value Angel Capital Assn Annual Summit Workshop Apr. 15, 2009;  http://www.basilpeters.com/Presentations/Maximizing_Exit_Value_20090415_Part_2.pdf , pg 5-10

Angels Need a 20-25%/yr Return

Basil Peters angel investor and Principal Strategic Exits Corporation

“[] angels need to get 20% to 25% per year [] the same [return] as a venture fund.  So, if you do the math, [] angels need to make three to five times their money in three to five years.”    Basil Peters, Seed Capital From Angel Investors: Basil Peters, CEO and Fund Manager, Fundamental Technologies II (Part 5);  Jul 7, 2010;  http://www.sramanamitra.com/2010/07/07/seed-capital-from-angel-investors-basil-peters-ceo-and-fund-manager-fundamental-technologies-ii-part-5/

Why VC's Block an Exit

Basil Peters angel investor and Principal Strategic Exits Corporation

“Most entrepreneurs don’t even know that a VC is likely to block an exit when they accept the VC’s money. [] VCs design their investment agreements to give them the power to block exits.”

“[] VCs will almost always block a sale where they only make a 3-4X return on their investment.  This could have easily been a 10X return for the angels and a 100X return for the entrepreneurs.

[] The winners [must] produce at least 10-30X return for the [VC] fund to perform respectably.

[] This propensity to block exits is one of the reasons that every company needs a clear exit strategy before [it approaches its] first investor.”  Basil Peters, How VCs Block Exits, August 28, 2010, http://www.exits.com/blog/how-vcs-block-exits/; Why VCs Will Block Good Exits;  http://www.angelblog.net/Why_VCs_Block_Good_Exits.html

The Exit Strategy is the Most Important Business Plan Element

Basil Peters angel investor and Principal Strategic Exits Corporation

The exit strategy is “the most important element in the business plan. [] It affects many daily business decisions. [] The chances of success increase dramatically [with] a good plan.  [It] is the plan for [] the entire business. 

[The] plan should start at the end (the goal).  An exit strategy could be as simple as: “Our exit strategy is to [sell the company] in about _ years for around $ _million.[]”

[] [With a well-designed and executed exit], [it’s] often possible to increase the exit valuation by 50 to 100%”, especially with early exits in inefficient markets. Basil Peters, Maximizing Exit Value Angel Capital Assn Annual Summit Workshop Apr. 15, 2009;  http://www.basilpeters.com/Presentations/Maximizing_Exit_Value_20090415_Part_2.pdf

Investors Only Care about Two Things

Jason Mendelson venture capitalist and Managing Director Foundry Group

“In general, there are only two things that investors really care about when making investments: returns and control.  Returns refer to the end-of-the-day financial return the investor will get and the terms that have direct impact on these economics.   Control refers to mechanisms that allow the investors to either affirmatively exercise control over the business or to veto certain decisions the company can make.”  Mendelson says that if an investor resists terms that don’t impact returns or control,  it may be a negotiating tactic, he may not be savvy or could just be a jackass.  Jason Mendelson, Do More Faster  by David Cohen & Brad Feld  copyrt 2011, Get Help with your Term Sheet  pg 238

High Valuations Can Limit Exit Opportunities

Josh Kopelman Partner First Round Capital and former entrepreneur

Kopelman advises that entrepreneurs who “[] try to maximize valuation [] in many cases [] might be shortsighted” because high valuations can limit exit opportunities.  “[] too many founders are not aware that they are shutting off the majority of exits -- and therefore increasing risks -- when they accept a high valuation.”  “[] the “unwritten term in the term sheet” [means] few VC’s will willingly part with a “winning company” (i.e., a company that is executing/performing well) for less than a 10x return.”  Thus, a VC could block an exit that could have been a fabulous payout for entrepreneurs and angels.  Josh Kopelman The Unintentional Moonshot, July 10, 2007, http://redeye.firstround.com/2007/07/the-unintention.html;  When the music stops... March 10, 2006;  http://redeye.firstround.com/2006/03/as_a_little_kid.html

Companies are Bought, not Sold

Josh Kopelman Partner First Round Capital and former entrepreneur

 “I [] believe that companies are not sold. They’re bought.

In every exit I’ve been fortunate enough to participate in – both big (Half.com or Infonautics) and small (Turntide, del.icio.us, Vamoose.com, e-Touch or Snapcentric) – the opportunity to exit was there only because we had begun to build a company that has differentiated technology, a strong team, offers customers real value, demonstrates traction in the marketplace, and/or solves a real need for the acquirer. You can’t build a company to sell it – I’ve never seen it work.”    Josh Kopelman, When the Music Stops… http://redeye.firstround.com/2006/03/as_a_little_kid.html

The Unwritten Term on the Term Sheet

Josh Kopelman Partner First Round Capital and former entrepreneur

 “When a company gets a term sheet with a high valuation, [the entrepreneur] need[s] to pay attention to the unwritten term on the term sheet.”  The entrepreneur should be ok “with [an] exit multiple that would generate [] returns [] to satisfy [] VC[‘s]. While every situation is unique, here's a simple rule of thumb:

Series A – 10X
Series B – 4-7X
Series C – 2-4X ”

“[] the “unwritten term in the term sheet” [means] few VC’s will willingly part with a “winning company” (i.e., a company that is executing/performing well) for less than a 10x return.”

Josh Kopelman The Unintentional Moonshot, July 10, 2007, http://redeye.firstround.com/2007/07/the-unintention.html; file Josh Kopelman Unintent Moonst Unwrt;      http://redeye.firstround.com/2006/03/as_a_little_kid.html

Considerations when Determining an Exit

Jeffrey Bussgang venture capitalist and General Partner Flybridge Capital Partners and former entrepreneur 

 “Timing and [one’s] own personal commitment are both important factors [in determining an exit].  Twitter’s Jack Dorsey gets asked [] - when will Twitter exit?  [Dorsey] explained [] his views on this issue [] that [essentially] the best entrepreneurs don’t focus on the money, they focus on their passion and dream for the business.

“You always have to go back to the question, ‘Is exiting the right thing for the product?’” Jack explained. “There were many times in our history when, technology-wise, we weren’t up to snuff and we could have used more infrastructure. We could have used the resources of a Google or a Facebook or a Yahoo!  But until you feel like you’ve completed some aspects of the vision, it just doesn’t make sense to hand it over.  If you have that idea and you’ve more or less seen the end of it, and now you’re just racking your brain trying to figure out how to push it any further, the product might be better off in the hands of someone else, because you’ve done what you can. That’s basically what it comes down to for me. Are you done? If you are, then exit. If you’re not, keep going for it.”” Jeffrey Bussgang, book Mastering the VC Game –A Venture Capital Insider Reveals How to get from Start-up to IPO on your terms. copyright 2010, pg 195