30 West 3rd

Very Early Stage Technology Investing

Exit Fixation

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I spent some time over the last week thinking about exits and how the world has changed in the last decade.  Eleven years ago I sold a company to a pre-IPO software company in California.  Six months before that happened it is safe to say that my business partner and I had never contemplated a liquidity event.  We were too busy running and growing the company to ponder an end to it.  I still remember operating the company as a great time in my life, as we morphed and grew and adapted.  I sense the entrepreneurial spirit of driving forward to build something that is self-sustaining and enduring has diminished in the last decade.

While I would never tell a company owner to ignore liquidity, it will most likely occur in a positive way if you are pouring your energy into growth and milestones.  When you are looking to sell you will only find bottom feeding buyers.  When you are looking to grow and prosper, you will likely find a buyer that wants to capture and own that magic.  I am increasingly mindful of this as I work with our portfolio companies and co-investors.  We are all very focused on capital raising and liquidity, and rightly so.  But I fear outside capital too often squeezes the joy out of company creation and company growth for the owners.  I spend too much time talking to CEO’s about fund-raising, not enough about revenue growth, sales and distribution, and market changing product ideas.

During the Internet bubble’s early days and to a lesser degree during the credit bubble this fixation was understandable.  But in today’s market, a liquidity event for a company is rarely an exit for the leadership team and often the shareholders.  Earn-outs are de rigueur today for founders and often attach to shareholders as well.  Founders who sell must navigate how to structure deals that make sense personally, which can include a few years of Tiffany-class servitude in a bigger company.

Better for investors and founders to be aligned on an exit that grants the liberty entrepreneurs and investors crave.  For investors that means cash at closing.  For founders that means being able to control and define their post-transaction involvement in the acquiring entity.  So how does that occur?  Three ways, I think.  First, getting customers to consistently purchase/use your high gross margin product is paramount.  Second, you must matter to customers that matter to an acquirer, not small and insignificant customers.  Third, you must show that you can win in competitive situations.  This is why breaking out of the boundary dimensions of your company – geography, vertical industry, platform, demographic – into a large market segment is so important.  It validates to a venture investor and to potential acquirers that you are going somewhere other than flat-line, segment-limited boredom.

In short, accelerating revenue growth is the path to capitalization and an exit.  We would all do well, investors and founders, to make sure we are doing all we can to make that happen.

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