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“Push to Exit” Startups: From Investment to Exit

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  1. “Push to Exit” Startups: From Investment to Exit Larry Kubal – Labrador Ventures March 11, 2008

  2. Push to Exit • 25 minutes, 25 slides on EXITology: • Part 1: TheoreticalWhere do exits fit into the liquidity cycle? Past, present & future for exits. • Part 2:TacticalHow 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

  3. Liquidity Cycle Recovery Continues • $29.8B in 2007, best since 2001 VC / Angelinvestmentsin companies • Up rounds exceeded down rounds for 16th consecutive quarter Company growth LP investment in VC • $34.7B in 2007, best since 2001 Angel Shortcut Company liquidity events • 2007 IPO and M&A strongest since 2000 CONFIDENTIAL

  4. Exits Have Been Recovering Since the Bubble Burst Total raised through M&A and IPO 2001-2007 $ (Billions) CONFIDENTIAL

  5. 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! CONFIDENTIAL

  6. 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 CONFIDENTIAL

  7. Significant Developments Flash Caution Signs • Credit crunch Depressed stock market causing depressed currency for acquisitions Depressed stock market Weak IPO environment Acquirers adopt a “wait and see” attitude Recession Consolidation = fewer potential acquirers Microhoo? CONFIDENTIAL

  8. Uncertainty of Exit Markets CreatesQuestion Marks for Venture Returns Growth 2008 2007 2006 Disappointment ? Market values Realism Hype 2000 2005 1999 2001 2004 2003 2002 Time Source: Morgan Stanley Dean Witter & Co., Labrador CONFIDENTIAL

  9. Push to Exit • 25 minutes, 25 slides on EXITology: • Part 1: TheoreticalWhere do exits fit into the liquidity cycle? Past, present & future for exits. • Part 2:TacticalHow 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

  10. Series A: What NOT to say to a VC CONFIDENTIAL

  11. 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.” CONFIDENTIAL

  12. 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” CONFIDENTIAL

  13. 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. CONFIDENTIAL

  14. Exit Implications: Strategic Investors • Easy Money with Benefits (… but often with strings attached) • Control Issues • Limitations on Exit • “Strategic” Guidelines • Later better • No board seat or control of a Series • Balance • Understand motivations and history • Operating deals alone are possible CONFIDENTIAL

  15. 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]. CONFIDENTIAL

  16. Push to Exit • 25 minutes, 25 slides on EXITology: • Part 1: TheoreticalWhere do exits fit into the liquidity cycle? Past, present & future for exits. • Part 2:TacticalHow 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

  17. 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 • Opportunistic liquidity reward • Negative - Forced • Investors are burnt out • Management is burnt out CONFIDENTIAL

  18. Define and Prioritize the Objectives of Exiting Speed – Timing Valuation Liquidity CONFIDENTIAL

  19. 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 CONFIDENTIAL

  20. 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," CONFIDENTIAL

  21. 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 CONFIDENTIAL

  22. Exit Execution: 4 Rules • Don’t flush value • Target intelligently • Don’t waste: capital & time efficiency • Align – Communicate – Don’t Stop CONFIDENTIAL

  23. Push to Exit • 25 minutes, 25 slides on EXITology: • Part 1: TheoreticalWhere do exits fit into the liquidity cycle? Past, present & future for exits. • Part 2:TacticalHow 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. WRAP UP CONFIDENTIAL

  24. Four Takeaway Thoughts • 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. CONFIDENTIAL

  25. “Push to Exit” Startups: From Investment to Exit Larry Kubal – Labrador Ventures lkubal@labrador.com www.labrador.com