exit strategies 401 - basil peters waterloo...• i am a geek, techie, nerd • phd in electrical...
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NACO Angel AcademyMay 2015
Exit Strategies 401
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About the Angel Academy
• This module will cover a wide range of tips and techniques, hard-won from the experience of angels who have gone before, to ensure a successful exit from angel investments. A systematic approach will be presented in which the exit strategy becomes the key driver of investment decision-making, including the screening and selection of investment opportunities, the structuring of term sheets, and the growth strategies for the new ventures.
About the Module
• Angel Academy is a special educational program offered by the National Angel Capital Organization. It is designed to improve the skills and knowledge of angel investors across Canada, and through them, increase the effectiveness of angel investments in growing entrepreneurial firms. The program comprises more than 20 modules on a wide range of topics essential to successful angel investing.
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About the Instructor
Basil Peters, PhD• Principal, Strategic Exits Corp.• VC, hedge fund, angel fund• Entrepreneur, sold to Cisco• Author, Early Exits: Exit Strategies for
Entrepreneurs and Angel Investors• Entrepreneur-in-Residence, SFU• Exits.com/blog• Angelblog.net• BasilPeters.com
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Session Agenda
1. Only 25% of saleable companies exit
2. Everything is changing
3. Every company should have an exit strategy
4. Don’t ride it over the top
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Only 25% of saleable companies exit
Section 1
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The Most Important Fact
• That I want you take away from this workshop And I hope may change your life And enrich the shareholders of your company
• Is that:
• Only 25% of saleable companies successfully exit.
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What?!
• Yes,
• I’m saying that 75% of the time, when entrepreneurs and investors build a company that could have been sold
• We blow it. And fail to successfully exit.
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Even Worse…
• That’s not even the worst news
• When a company fails to exit at around the optimum time, there is a high probability that it won’t just fail to exit But that it will fail completely (i.e. go out of business)
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Exit Probabilities for Saleable Companies
Successful Exit Poor Exit No Exit
Successful Exits
Poor Quality Exits
No Exit
For Saleable Angel Backed and Bootstrapped Companies
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That’s Terrifying … But
• Depressing
• You’re probably thinking: But why haven’t I heard that before? Why isn’t this more widely known? Who is Basil Peters and why is he saying these
things?
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We Don’t Have Hard Data
• Entrepreneurship is exploding all around the world Many universities are now offering undergrad and
graduate courses in entrepreneurship A few professors are starting to conduct serious
research on entrepreneurship A few non-profits are funding some early research to
capture data
• But we still don’t have the hard data we need
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The Data We’d Like To Have
• What we wish we had is a big database that tracked startups all the way through their corporate life cycle Included data on how the companies were financed, What their strategies were at different stages and how
well they were executed And what the eventual outcomes were
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Then If We Had the Hard Data
• Then if we had this big database, we could start to do some analysis
• Determine which strategies were correlated with different outcomes Which strategies resulted in the highest probabilities
of entrepreneurial success
• And then start to develop some best practices
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Unfortunately That’s Not Easy
• When my fellow researchers (who are the some of the top entrepreneurship professors) and I agree on what we need, we almost immediately also realize this is an extraordinarily difficult data set to capture First because it would require following companies
through their entire life cycles Which probably still averages 10 years
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Why It’s So Difficult
• We’d need to track each company Develop uniform ways to measure and capture their
corporate strategies At every stage in the company’s evolution And include their product strategy and execution, HR
philosophies and environment And even the quality of the CEO and Board
• So we could learn about what worked and didn’t
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And the World is Changing
• And even if we could gather this data, the world is constantly changing
• For example, if you ran this experiment through the 1990s, I am sure the result would have been that companies
with a strategy focused on public market (i.e. IPO) financings and exits would have been the most successful
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And a Decade Later That was Fatal
• Imagine that we this big database in the 1990s And discovered the best strategy was IPOs And published that around 2000 With the conclusion entrepreneurs and investors should
focus on public financings
• That would have been the absolute worst strategy to follow for the next 10 years
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So How Do We Learn?
• So how do we learn to be better entrepreneurs and investors? We can’t wait for the academic research (which is
still decades away)
• We have to rely on anecdotal observation We have to make the most important decisions in
our businesses based largely on our observations and discussions
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That’s Why Meetings Like This
• Are so important. They are an opportunity to share and discuss our observations To exchange ideas on what works in today’s economy To challenge ourselves and each other To apply our collective observations To build the best practices for today
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So Who Am I and Why Am I Here?
• I’ve been fortunate in my career
• It’s allowed me to be here with you today to do what I love
• Which is to help entrepreneurs and investors be more successful To have more exits To make more money To have more fun.
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My Background and Perspective
• I am a geek, techie, nerd
• PhD in Electrical and Computer Engineering from University of British Columbia in 1982
• Graduated at the top of my class – twice
• Started my first company at grad school
• Nexus grew to be the world’s 2nd largest manufacturer of cable TV headends
• Sold in 1993 to Scientific Atlanta and is now part of Cisco
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My Tech Investment Funds
• When we sold Nexus, it was the first time I had money to invest Been an enthusiastic tech investor since
• Founded and managed a successful: Hedge fund Venture Capital fund Angel fund Now run a boutique M&A Advisory firm
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My Investments and Financings
• I’ve watched over 1,000 company pitches for financing
• I’ve made about 100 early-stage technology investments Slightly less than half produced a return
• I’ve been directly involved in over 100 technology company financings (all successfully completed)
• I’ve worked directly on several dozen exits
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YPO / WPO
• I’ve also been fortunate to be in YPO / WPO for over 25 years (I got in young)
• And while we all agree never to disclose anything ever those confidential CEO peer conversations give me some invaluable insights Especially into the exit process
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My Anecdotal Observations
• I’ve been an active investor for 25 years Primarily focused on tech in Vancouver
• For years when I was a VC I had a team whose job it was to look at every investment Realistically we probably saw half
• Also belonged to four angel groups for years
• I’ve been following many of those companies, and working with their investors, for decades
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Vancouver is Like the Valley
• Vancouver’s entrepreneurial community has very similar characteristics to Silicon Valley or Boston Our local government has a tax credit for angels and
has been gathering data for 20 years We have some excellent research to prove that our
exit rates are as good, or better, than the other centers of tech entrepreneurship
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This is What I’ve Learned
• My experience has taught me: Being an entrepreneur is hard Being an investor is even harder Actually investing is easy Getting your money back is the hard part And hardest, and most important of all, is the exit
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Remember This is Anecdotal
• Please keep in mind that this is anecdotal observation, not hard data I don’t have a database that shows only 25% of
saleable companies have good exits
• What I know is that it’s far less than half And probably more than 10% “Saleable” is also a matter of judgement
• 25% is the best observational data we have
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Exits Don’t Happen Very Often
• One of the things that make exits very difficult to learn about is simply because they don’t happen very often We don’t have much data, but we do know that only
about 10% of the companies that receive angel financing have an exit
And to watch just one company might require 5 to 10 years of observation
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Not All Exits Are Happy Ones
• And even when companies do have an exit many of the “exits” we hear about are actually failures Some are distressed sales at valuations much lower than
the investors paid Some exits that people talk about in the press or their
resumes were really orderly wind-downs
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And Many are Sub-Optimal
• In addition to the unhappy exits, many are what I call sub-optimal Usually because the shareholders had no idea that they
sold their company for far less than it was worth
• Today, I want to focus on successful exits The type of exit you want for your company
• An exit that happens and is fair to your shareholders
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The Accursed NDAs
• My personal mission is to develop and share best practices on exits In part, to do that I run a boutique M&A advisory firm
• My hope is that each transaction we undertake will contribute to the knowledge that I can share Unfortunately I can’t even mention some of the very
best case studies Because most are under an NDA
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I Do Have Some Excellent Cases
• I am fortunate that I do have some very valuable exit case studies that I have permission to share
• They are described on my blog, often with videos of the CEO or Chairman
• And provide some of the most important observations for my workshops, talks and writing which I hope will be valuable to you
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What Does This Mean for You?
• We are all still learning to be entrepreneurs and investors The part we’re the least good at is the exit
• On average, of the saleable companies we build,
• Today only 25% have successful exits
• The good news is that I believe we can easily increase that percentage to 50%
• And my ambition is to help get it closer to 75%
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My Goal for Today
• What I hope to accomplish today is to provide you the take-home knowledge and skills To increase the probability that your companies have
successful exits
• So you’ll have more exits More money And more fun.
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Everything is changing
Section 2
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Everything is Changing
• We are living through an interesting time
• The economy is changing
• The whole world is changing
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Entire Countries are Bankrupt
Other countries will certainly follow
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Lehman Brothers Is Gone
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GM Bankrupt
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Global Trade Changed Everything
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The World is Now a Small Place
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The World Has Changed
• Many big parts of the financial ecosystem that worked for a hundred years don’t work at all anymore
• The economy has changed
• The whole world is changing
• Faster than ever before
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Canada’s Most Valuable Corp
• Nortel was founded in 1882
• In 2000, Nortel’s value was a third of the entire TSX index – Canada’s most valuable Market cap was $398 Billion Employed 94,500 people
• Bankrupt in 2009 Assets sold to companies around the world
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Other Big Tech Companies
• Was Nortel just a single example? Or a made-in-Canada failure?
• What about the other big, great tech companies?
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Intel – 15 years
Bubble
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Microsoft – 15 years
Bubble
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Cisco – 15 years
Bubble
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None Are Creating Wealth
• For their investors,
• And more importantly for their employees
• For decades, these greats were all built on the increasing value of their stock options
• That’s what used to bring, and retain, the best and the brightest to these big companies
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Innovation in Smaller Companies
• The best and the brightest now work in startups Small companies create opportunities Where the smart people create the innovations
• That’s why all the economic and employment growth is created by startups It wasn’t like this 10 or 20 years ago
• New research is helping us understand why this change has occurred
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Startups Create All the Growth
• In the old economy big was an advantage
• Today being big seems to be the opposite All of the economic growth now is happening in small
companies
• In fact, startups have created ALL of the new jobs for the past three decades
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Big Companies Want to Grow
• The CEOs of the big companies with the flat stock charts are under intense pressure to grow To grow, they need innovation
• But that innovation is no longer happening in their companies – it’s in startups
• So big companies have to acquire I believe they are acquiring at a rate, and with an
enthusiasm, that we’ve never seen before
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The Media Distorts our Perception
• The media distorts our perception by focusing on the multi-billion dollar M&A deals YouTube and Skype
• Big company boards are starting to realize those huge transactions rarely work out well And corporate America is figuring that out
• Huge M&As aren’t happening as often either
• The big new story is the much larger number of small exits
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Most Exits Are Under $15 Million
• Mergerstat database shows the median price of private company acquisitions is under $25 million, when price is disclosed But the price is not disclosed in most smaller
transactions
• Today, I estimate the median price to be wellunder $20 million And probably below $15 million
• That was a surprise to me just a few years ago
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Our 21st Century Economy
• What works today:1. Small companies innovate2. Angels, Friends and Family finance them3. Big companies, and others, buy them early4. The buyers then grow the business5. Entrepreneurs and investors recycle the gains
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Exits are the Best Part
• I believe exits are the best part of being an entrepreneur or investor It’s when we get paid for all of our hard work and risk
capital
• But it’s also the least well understood part of being an entrepreneur or private investor Simply because it doesn’t happen very often
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Exits Today
• Selling a business is usually the biggest financial transaction of your career It’s exciting – and will certainly change your life
• Much of what we thought we knew about exits has changed in the past 5 to 10 years The structure of our economy has changed There have never been so many buyers with so much
money targeted to small acquisitions
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This is a Golden Era
• I believe history will describe this time as a Golden Era for entrepreneurs and angel investors
• Never before has it been so easy to create such valuable companies Using so little capital
• And sell them so early For so much money
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Every company should have an exit strategy
Section 3
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Much of What You Hear is Wrong
• It’s surprising how much of what you hear about exits is wrong – dangerously wrong There are so many myths and misperceptions And so many ‘experts’ And quite a few dirty secrets
• The economy has also changed – a lot
• This workshop is about what actually works today - in our current economy
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The Two Types of Companies
• All companies can be divided into types:1. Companies built for cash flow to owners2. Companies designed for an exit
• Only one type works for investors But even the first type company should have
an exit strategy
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The Exit Is Just Another Process
• Whether it’s a financing, product development, marketing or sales goal, the chances of success increase dramatically if you have a good plan
• The exit strategy is the plan for the business –the entire business The plan should start at the end (the goal)
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Companies Are Sold, Not Bought
• I often hear ‘companies are bought, not sold’ People think that when ‘it’s time’ someone will knock on
their door asking to buy their company
• While that has happened, it’s almost never a good thing for the shareholders It’s not just that the price will be much lower More importantly, the probability of success decreases
because there is usually one bidder
• Optimum exits require strategy and planning
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Focusing on Exits is Healthy
• Another misperception you often hear repeated is that entrepreneurs should focus on the business and not worry about the exit In my opinion, that is just plain wrong
• A focus on exits is healthy – and does not distract the team from their primary function of maximizing shareholder value In fact, I believe it does just the opposite
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Planning for Successful Exits
• I believe entrepreneurs and angel investors would have better returns and more fun if we designed and built more companies with a focus on the exit Works particularly well in today’s economy
• What are the steps?
• Where do we start?
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Developing an Exit Strategy
• The most important element in the business plan
• Every company has an exit strategy Even if nobody realizes it Even if it’s a lifestyle business without investors
• The exit strategy affects a surprising number of daily business decisions
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The Exit Strategy
• An Exit Strategy can be as simple as: “Our exit strategy is to [sell the company] in about __
years for around $ __ million. We plan to execute the exit by engaging a [mid market
M&A advisor] by _[date]_.”
• The optimum exit strategy depends on the type of company
• Entrepreneurs usually need some help determining their optimum exit strategy
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Check The Alignment
• It’s surprising how often there is a seriousmisalignment between key stakeholders on the exit strategy
• The only way to check is to get a ‘signoff’ on a written exit strategy Usually takes at least one offsite planning retreat to
build full alignment
• Even after, check alignment annually
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First: Exit Strategy, Then Finance
• This doesn’t happen most of the time
• But the right way to build a company is Determine the type of business Build alignment on the exit strategy THEN develop the financing plan And then start to contact investors
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Why the Exit Strategy Comes First
• Different types of investors are compatible with different types of exit strategies! Making a mistake about this early on can easily cost you
your entire company It almost cost me my first company A video of my war story is online at:
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Check Financial DNA Before
EntrepreneurialDNA
Investors’DNA
Resulting CorporateDNA is a Hybrid of
Entrepreneurs’ and Investors’ DNA
Check the compatibility first
Combined with
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A Common Misunderstanding
• A common misunderstanding about M&A exits is that you have to grow the company to be profitable Or grow it to be larger than $X millions of revenue
• The real threshold is to ‘prove the business model’
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What it Means to Prove the Model
• In a recurring revenue business, for example, you have a spreadsheet that clearly shows actual results for:
1. Gross margin per customer2. Customer lifetime (or churn)3. Cost of customer acquisition
• In other words, how much is a customer worth and what do they cost to acquire?
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Proven Model and Value
• Some businesses have slightly different metrics to prove the model
• But when you prove the model you can build a credible projection that shows:
1. If new owners added $X millions of capital,2. The business would have Y customers 3. And be worth $Z millions
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That’s When You Can Sell
• There are often additional factors like competitors and market changes
• But the important threshold to determine when you can sell is when you have proven the model This is when you can have a reasonable negotiation on
value and sell the company
• You do not have to be profitable Today, even pre-revenue exits are possible
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It’s Often the Optimum Time
• As soon as you prove the model is often the best time to sell Always best to sell on an upward trend
• Sell on the promise not the reality Often when you can get the best price
• Very often ‘stuff happens’ Most entrepreneurs ‘ride it over the top’
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Our Species is Evolving
• People under 30 years old have much shorter attention spans It’s not just in their multi-tasking conversations or
reading material
• This shorter attention span also means that many of the team will start to think about moving to new jobs after 2 or 3 years
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The “Equity Effect”
• Psychological vesting is about 2/3 of the time That means that the smart portfolio decision for the
employees is to move to the next company at: Time = 0.67 Vesting Period
The best and brightest go first
• These combine to mean that many modern companies at two or three years from startup are ‘middle aged’ and starting to decline
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Optimum Equity Vesting
• Vesting is the most important part of structure
• IMO all stock options, and all nominally priced shares, should vest on the following basis: 50% of the shares will vest daily and linearly over a
three year period; and The other 50% will not vest unless and until there is a
sale of the company All vesting accelerates on a sale
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The Exit Strategy Effects
• A clear exit strategy has many operational benefits Maximizes the overall generation of shareholder value
through focus and alignment Affects daily management decisions Beneficial in recruitment and retention
• Especially of the best and brightest
• Which is increasingly important today
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Exit Strategy Summary
• The exit strategy is the highest level strategy in the organization
• It’s the foundation for the entire company plan
• It aligns the team on the most important goal*:
• The maximization of shareholder value, and
• The optimum timing of it’s monetization
*Assuming it’s a company with investors
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Videos on Exit Strategy
• Videos of some of my talks on exit strategy
• And what not to do:
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Don’t ride it over the top
Section 4
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Strategy & Planning: Timing
• Timing is an important part of exit strategy and planning
• An exit usually takes 6 to 18 months From the time you engage the M&A professionals until
the cash is in the bank
• But it can often take longer if the company isn’t ready, or if the structure needs to be cleaned up, or if the financials need improvement
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Exiting in Internet Time
• The internet has accelerated everything It allows entrepreneurs to market and sell to hundreds
of millions of prospects in just days
• The internet has also accelerated almost every other aspect of the startup lifecycle Entrepreneurs now have “Weekenders” where they
build entire companies in a weekend
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Weekender Sold in 10 Days
• In 2009 when I wrote “Early Exits” I speculated that one day: “They’ll probably define an
early exit as selling the company before the end of the weekender”
• That almost happened in November 2009 A team of entrepreneurs in London built a business in
one day and sold it online in ten days: <– great video
• Not an isolated example, see
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More Exits In Just 2 – 3 Years
• Club Penguin for $350 million at 2 years old• YouTube sold for $1.6 billion at 2 years old• Playfish sold for $275 million at 2 years old• Mint sold for $170 million at 3 years old• AdMob sold for $750 million at 3.5 years old• Twitch sold for $970 million at 3 years old• Oculus VR – crowdfunded Aug 2012 – sold Aug
2014 for $2 billion – 2 yrs old – still in development
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A B.C. Really Early Exit
• This Vancouver company asked me to keep their details confidential – for now
• They wanted to test the idea for their first product, so called on a medium-sized US corp
• The prospect soon asked to buy the company
• The CEO called me for help
• Three months later the money was in the bank
• Company was less than 12 months from startup and still hadn’t launched the first product
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A New Really Early Exit
• Anyone heard of the company PumkinHead? How about their product - About.me?
• About.me was acquired by AOL Just four days after its public launch That may be a new record
• Better way to measure is from startup (= 1 year)
• This illustrates what experienced entrepreneurs and investors can accomplish in this market
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How Long It Takes to Exit
• The short answer is usually 6 to 18 months From the time you engage the M&A professionals until
the cash is in the bank
• But it can often take longer if the company isn’t ready, or if the structure needs to be cleaned up, or if the financials need improvement
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Ideal Exit Timing
• In an ideal situation, the company board would incorporate this 6 to 18 month delay into the company strategic and operating plans
• Look forward in time and then start the exit 12 to 18 months before the peak in the company’s exit
value
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Ideal Exit Timing
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“Riding It Over the Top”
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Optimum exit time
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Fastest Growth Phase
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The Financial Loss
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Financial Loss
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Part of Your Life You Never Get Back
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Optimum exit time
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Part of Your LifeYou Never Get Back
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This is Actually Optimistic
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Optimum exit time
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What Often Happens
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Why?
• After seeing this happen over and over again I started to recognize a few patterns and realized there were logical reasons
• Why, if a company misses the ideal time to exit, there’s a significant probability it won’t just exit for less But will never exit at all
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Reasons This Happens
1. Over-investment by VCs2. Competition3. Intellectual property infringement4. Negative momentum5. Waves of Consolidation
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Over Investment
• When a sector becomes “hot” many Venture Capital funds will invest simultaneously All hoping to fund on of the few winners capitalizing on
the new technology or trend
• Most VCs have much more money than they can deploy well When they find a new opportunity, they typically invest
very aggressively - $10s millions
• Often driving early innovators out of business
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Competition
• Competition is a surprisingly common reason promising companies end up never exiting Startups often succeed early because they apply a new
technology, Or recognize a trend or new market opportunity
• Often their own success generates awareness and attracts new entrants into the market Just as the market is maturing and becoming more
expensive to operate in
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Patents and Successful Exits
• Patents have become a much more valuable tool for entrepreneurs and angels Attitudes about patents are changing – globally
• America now has a first to file system, no longer first to invent And a rapid approval process Patents can be filed quickly and economically
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Patents – a Double Edged Sword
• Most of the legislative and common law changes benefit inventors and entrepreneurs Entrepreneurs have won big cases recently
• But some of the global attitude changes create serious risks for smaller companies
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Big Company Patent Attitudes
• One of the difficulties with patents is that you never really know if the patent is valuable until after the appeal Which can easily take a decade
• Technology companies just can’t wait that long Many big companies - especially in Asia - take the
attitude that they will just use the IP and let the lawyers figure it out later
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What it Takes to Defend a Patent
• I’ve asked several patent lawyers what it would cost to prosecute a patent infringement like that
• It’s difficult to know exactly, but they say it would take $1 million just to get started And could cost $5 to 10 million And take 10 years
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Outcomes are Not Perfect
• Even after spending $5 to 10 million and taking a decade to defend a very strong patent
• There is still a strong probability you will lose According to PwC’s 2012 Patent Litigation Study, patent
holders have nearly a 40% chance of losing their case
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Why Small Companies Lose
• One reason a lot of inventors and small companies ultimately lose is simply the quality of the lawyers Some patent lawyers have said to me that the quality of
the lawyers is more important than the quality of the patent
Especially if it is a jury trial
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The Big Companies Know
• Many big companies employ hundreds of patent lawyers – really good ones They know that their lawyers will win a percentage of
the time, no matter what the merits And they know they will win much more often against a
small company that can’t afford to hire the very best legal team
• They also know that many times a small company can’t even afford to start the suit, so they will win by default
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If You Have a Good Patent - Sell
• In my opinion, if you have a good patent, the only reasonable strategy is to sell the company As soon as possible after the patent is granted, Or when you have disclosed the technology Whichever is sooner
• The risks of not selling early just aren’t a good business, or investment, decision
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Negative Momentum
• It’s not easy to see the stock price graph in a private company
• But after a while, the team gets a sense that value has peaked and is decreasing The fun and excitement are gone The best and brightest leave first Followed by the other most valuable people
• Ultimately causing the company to lose even more momentum
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Waves of Consolidation
• A more devastating reason that companies that miss the ideal time often end up never exiting is “Waves of Consolidation” This is a relatively new phenomena driven by early exits
and internet acceleration
• Unlike the earlier threats, missing this effect is virtually impossible to fix after the fact Almost always fatal – even if it takes years
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The Beginnings of a Wave
• Today, we are all connected by the internet and especially social media Lets us see what’s happening in the world and our
businesses better and faster than ever
• In business today, most competitors have immediate access to the same information And make similar decisions at almost the same times
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Large Company Growth
• Medium and large companies grow primarily through acquisition Many have more cash than they can deploy
• And are under pressure to acquire companies Partly to grow but also to keep new innovations from
being acquired by their competitors
• And because the buyers are all connected they often make decisions at the same time
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Hypothetical Example
• For simplicity, let’s imagine an industry where there are three large competitors All run by smart executives And all with lots of cash
• When technology or markets create a new opportunity to grow their businesses They usually all see it at about the same time Sometimes triggered by an external event
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They All Decide to Acquire
• Often they all decide at the same time to acquire a company in a specific space In many situations, the impetus is external For example, created by an M&A advisor who shows
a specific company to all of the potential acquirers in the world
And describes the strategic opportunity
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They All Get Interested
• The buyers all work in the same global market
• If an acquisition makes sense for one of them, it usually does for others too
• And what M&A advisors all hope for is that several buyers will get interested And a competitive bidding situation will develop Which is good from the seller’s perspective
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The Buyers are Smart Too
• Regardless of whether they got the idea from an M&A advisor, or some other way
• Once they decide they want to acquire a business in a certain area, they Look at most of the companies in the field Let M&A advisors know they are looking And make direct, unsolicited offers to acquire
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Why The Buyers Do This
• Buyers have several motivations: To determine which company is most attractive for them
to acquire – i.e. price To give them more choices and therefore more
negotiating leverage To ensure that if they don’t win the auction on their first
choice, they have a backup acquisition opportunity
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And People Start to Notice
• This starts a cascade of events The big company’s competitors hear they are interested
in acquiring a certain type of company They don’t want to be late, so they also start And get their corporate development teams and M&A
advisors looking
• Soon every company in the industry has received some unsolicited interest
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The Wave
• Which creates the beginning of the wave Buyer interest brings in more buyers And more M&A advisors
• Which flushes out more companies that could be acquired Starting them on their own exit process All building to a flurry of acquisitions in the niche or
sector
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It’s Too Late When You See It
• From the outside, it looks like this happened very quickly Often just within a quarter or two
• But it had actually been going on for much longer But because public companies, and NDAs, are involved
it’s not easy to see from the outside
• Once a company sees the wave it’s often too late to react
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What Happens After the Wave
• The wave results in most companies who want to buy finding a company to acquire Almost overnight the buyer interest stops
• If a company did not get acquired during the wave, it is virtually impossible after And that’s not the worst news
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The Market After the Wave
• After the buying crescendo, each of the successful buying companies have just paid a lot to enter this new sector Usually $10 – 20 million
• Most of the buyers will plan to invest a similar amount in growing their new acquisition and competing for market share against their traditional competitors
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Killing the Small Companies
• The companies that were not acquired are now in a very difficult situation Their market has become much more competitive
• Instead of fighting with other small, underfunded companies, they are up against giants With enormous investment capability and highly
effective brands
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Killing the Small Companies
• The small companies cannot afford to compete Or to operate in an industry where everyone is willing to
lose money – possibly for years
• Often small businesses that were very profitable become unprofitable almost overnight And at the same time, their ability to raise capital
disappears because the investors saw the wave And don’t want to fund a fight with the big guys And know a future exit is very unlikely
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Missing the Wave
• Missing the Wave of Consolidation is a particularly heartbreaking error Many of the companies that missed were very
valuable and often extremely profitable The wave destroys both
• For CEOs that have built valuable businesses, Not missing the wave might be their most important job
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The Right Side of the Wave
• Most CEOs are so busy operating the business it’s almost impossible to watch closely enough And the early signs are not easy to see even if you are
looking
• The best way to get an early indication is to watch the trends that start the wave process The other is to speak to a lot of M&A advisors
• Almost all CEOs need help with this
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An Unsolicited Offer
• One of the saddest parts of my job is to explain this to CEOs
• They often contact me all excited about a big company talking about an unsolicited offer
• I start by saying that’s rarely good news for the shareholders
• But after learning more, see the signs of a wave of consolidation
• At that point they are dangerously late
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Summary on Exit Timing
• Like many parts of life, and business, “timing is everything” with exits Timing our exits better can significantly improve angel
investor portfolio returns And for entrepreneurs can literally change their lives
• Recommendations: Have someone watching the M&A market Design your exit process – don’t wait for an offer
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Questions?
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For more information about the Angel Academy please contact the National Angel Capital Organization…
wwww.nacocanada.org
Thank-you