ACTIVIST VC BLOG

Exit: Preparing for the battle

In our mind, guidance for exit is one of the most valuable things a VC can bring to the table – and  it is naturally an important task for our Company Canvas process.

Exit is also a fairly complex process – a constantly moving target with multiple different paths like:

To keep things simple and short enough, we now focus on how to prepare and create momentum for being acquired by an other corporation. (A separate blog entry about the actual exit process will be posted at a later date.)

Scouting the landscape

The first step is to scout and map the M&A landscape:

  1. Identifying potential buyers
  2. Assessing their activity, appetite and value drivers for M&A

The exit value can be dominated by two very different factors: either strategic or financial value for the buyer.

Strategic vs. financial value of a tech startup

Strategic Value vs. Financial Value in Exit

A strategic exit scenario

  • A trendy startup with a hot innovation can create serious M&A interest, even in pre-revenue phase.
  • Early strategic exits leads to high return multiples and IRR
  • As the strategic value peak can be very sharp, timing is crucial
  • Improving the strategic fit and value is not always simple – it might mean different things for different buyers

A financial exit scenario

  • Developing a startup to a strong financial exit position usually requires more time and capital
  • A profitable company is much more in control of its own fate
  • Valuation is improved by optimizing the key financial indicators

The typical story behind the exit valuation is somewhere in between: partly strategic, partly financial.

We at Nexit typically target for both strategic and financial exit paths to maximize the odds (and the valuation). If we are lucky, we get a fast, high value strategic exit. Quite often the reality is a longer path: a financial exit scenario with some added strategic value.

Professional help needed?

Getting a sharp and precise view of exit landscape is challenging and time consuming. We often ask opinions from a small group of well networked and analytical investment bankers (often years in advance) to maximize exit potential. This dialogue also makes our companies more visible in the M&A field, as the bankers regularly meet with the potential buyers to advise them and guide their thinking about potential acquisition targets. If we are not on the radar of the relevant buyers, we try to figure out how to get there.

With one notable exception, Nexit has always worked with a professional banker.

What does the doctor say?

Any advice coming either from our Company Canvas process or from the investment bankers is naturally very case-specific and is prone to change as both the market and the company evolves. Below is some real life examples of the feedback given to our portfolio companies (please don’t get confused – the advice to different companies at different times might sound contradictory):

Focus, target market & business model

  • Full focus on one business. Divest all other businesses, as they are just distracting you and the potential buyers.
  • Develop a story and roadmap to address a substantially larger market – your current target market is too small.
  • Move to a SaaS business model well in advance and utilize the higher SaaS multiples in the exit.

Growth vs profit

  • Your current 50% revenue growth is enough – profitability is more important. The exit value is based on your cash EBITDA.
  • Concentrate on extreme growth, in this business you need to be the market leader to be acquired with a good valuation.
  • Reach profitability: in the current market conditions all potential buyers are very conservative.

Timing

  • The general M&A sentiment is very hot. You need to hurry up before the sentiment changes.
  • The strategic value peak for your innovation is not yet here: educate the market and be visible on the radar of potential buyers.
  • Consolidation is starting – you must be active now to be part of the winning team. Don’t be left out alone.

The final exit advice

Great companies are bought, not sold.

Yes, we agree: you usually get a better prize when someone approaches you to buy the company as opposed to soliciting bids. And the best way to great exit is to build a great company. It is not about illusions and putting some strong makeup on a mediocre company.

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