Having a Plan for an Exit – Hint, you don’t have to sell.

Having a Plan for an Exit – Hint, you don’t have to sell.

Originally published on Startup Digest – Prepping for Exit – a Founder’s Perspective on M&A

This may be your year to think about exiting – or it may be the year you raise a big round of funding. Let me contrast the options that you will often hear called by the name “Dual Track.” 

You need capital for growth this year and you’re not sure if you can raise a big Series A Round or another series Seed round. Series Seed rounds now range from Seed 1 to Seed 10, based on the Crunchbase Data, and are generally expected to get you to the next major milestone that is typically 18 months away. This gives you 12 months after the fundraising round to deploy capital into growth and 6 more months to raise the next round of funding. 

You should be doubling your post-money value for the next round of funding. This cycle of 18 months, double and go raise another round is why it feels like a hamster wheel and why you’ll hear founders say that fundraising is a full-time job. It is. 

Typically, this type of investor is going to expect growth >50% depending on where you are starting from in Annual Revenue. Before you take this capital, you need to make sure you have a plan for how to use the cash to grow. 

Though an industry return on a VC fund is usually 4X because of the failure rate. You’ll hear VCs talk about looking for 10X returns. That means if they put in $5M in this round they are going to look for a $50M return. For many startups, that implies another 5-7 years before you get that return. 

As the founder, you likely have 5-7 years into your venture already and are considering if you want to double down. 

The other track is looking for a buyer and a price that makes it worthwhile to sell today. The price will also depend on your growth – but also the strategic value to the investor. I’ve talked about buyer profiles in a previous post, but when you’re looking to sell the best buyer is one that has a customer base and a business that is complementary to your business. That company will pay a premium, at least compared to a financial buyer. 

The book you’re producing for the fundraising process uses the same basic material that’s in your investor deck. The process is usually managed by a banker and the book is a little more of a teaser called a Confidential Investment Memorandum or CIM. The CIM is completed with an executive summary. The executive summary typically doesn’t have the seller’s name on the document and is more confidential than a CIM. 

Using a list of the top 10 target buyers, we circulate the Exec Summary to gauge interest in a purchase. The banker drives for a timeline of a response date and uses an Indication of Interest (IOI) prior to sharing the CIM with any of the buyers. 

Meanwhile, you’re working on the fundraising process as well. 

Both the buyer and investor want to meet with the CEO. As a banker, we just screen the buyers more before the meeting. There are bankers that will fundraise for a fee, however, most investors aren’t fond of their capital going to a fundraiser. Buyers are used to bankers being involved. 

Ultimately, if you don’t find the terms that you find acceptable, you don’t have to sell or take the investment. You can keep growing the way you are going today. 

Being prepared to sell doesn’t mean you have to sell.

https://pitchbook.com/news/articles/in-the-us-middle-market-soaring-valuations-beget-an-add-on-frenzy
https://pitchbook.com/news/articles/vc-to-pe-buyouts-anticipated-to-continue-aplenty-in-2020


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