Most startups and emerging companies miss the opportunity for an effective exit strategy by not integrating exit strategy into their business development activities. The most likely M&A partner is an existing business partner, especially if you are making the partner successful. By understanding the relationship between business development and exit strategy, you can utilize your partnership efforts to accomplish both objectives.
Startups are often told that exit planning is a dirty word, because investors (mainly venture capital firms) want the startups focused on building the next $1B company. Unfortunately, only 0.07% of the companies make it into this “Unicorn Club”1. Additionally, only 22.5% of venture back companies go public (although that number does seem high)2. The remaining startups are left to contemplate a different future: bankruptcy, M&A exit or stagnation (also known as irrelevancy to your investors looking for a return). Of course, everyone knows that significant amount of investor returns come from M&A exits, which creates a dichotomy between what your investors tell you and the realities that everyone knows. To deal with this dichotomy, startups should integrate an exit strategy into their business development activities.
Without an exit strategy, startups often lose significant value in their exit. The startups aren’t prepared for the worst-case and best-case scenarios. In the worst-case scenarios, companies wake up one morning to realize that their funding is drying up and they haven’t achieved profitability. The inevitable scramble to find an exit ensues. However, the harsh reality sets-in for these companies when they realize that they haven’t built the necessary partner relationships to facilitate an exit. There is a mad scramble to figure out the potential buyers, who is the right person at the partner to execute an M&A deal, and how to pitch an acquisition to each company. Often, companies face the terrible phone call of having to introduce their company to a potential buyer, explain to the buyer why they are great, and explain why they must sell in the next few months. The success rate of such “fire sales” is low, and even if the company can find a buyer, the valuation is usually pennies on the dollar.
In the best-case scenario, when your company receives its first unsolicited M&A offer, you want to reach out to other potential buyers to solicit competing bids. When companies aren’t prepared, they are forced to pay millions to advisors to find other potential buyers. However, if you have done your planning in advance, you should already know who the other potential bidders are and can save significant fees. Additionally, the window for obtaining other bids is often short and other potential buyers are in reactionary mode. The internal process for potential buyers takes time. Many potential buyers can’t respond quickly enough to make a serious competing bid.
To avoid these scenarios, you should integrate exit strategy into your business development activities. With any business development effort, you should start by understanding your ecosystem, including your competitors, inbound partners, alliance partners, go-to-market (GTM) partners, GTM alliances and other partners. As you build your business, you will start forming partnerships with the key players in your ecosystem.
Layering an exit strategy over your business development activities only requires a slightly different analysis of your partners. You should understand (1) your M&A fit to their organization, (2) the rationale for a potential acquisition, (3) the partners M&A history, (4) the “M&A power structure” at the partner, and (5) the key decision makers to know for M&A activities. Once you understand these factors, you will have a roadmap for positioning your company for a potential exit.
2 The Venture Capital Cycle, 2nd edition, 2006.