Building an Exit Path

The Exit Path Book

The idea came to me after I had my first disaster with my first startup. And then I did the complete opposite with my next one and saw radically different results. Then I tried passing those learning on to other entrepreneurs and they also saw good results.

So it dawned on me that had I actually had a book like this when I did my first startup, I probably would have had a very different ending. So that gave me the idea of actually putting down the writings.

I started collecting those stories and other stories from other folks that I come across. I became primed for this M&A world and the book practically wrote itself at some point.

What I preach in this book is to get started early on in creating your exit strategy and implementing steps towards that. I'm really passionate about this.

Isn’t it better to focus on the mission?

I have a very different perspective on it. There's always this prevailing dichotomy that you either build a business that will last or you build a business to sell. To me that's a false dichotomy.

There are a lot of misunderstandings and myths out there about what selling a company needs. Most entrepreneurs start a business with a mission. They don't consider it the fastest way to make a quick buck. We all know entrepreneurship is not that. 

But chances are, startups don’t succeed. There're more startups that fail than succeed. In fact, after five years, more startups don't survive. 70% of venture-backed startups don't even return the money that was put into them. So the statistics are pretty dismal.

Behind a lot of these innovative ventures is a mission. It's a core idea, a belief about how the future should unfold, and wanting to participate in that. So that founding mission is what gives rise to a startup.

And then somehow, with the emergencies and daily fires and everything, a lot of people tend to lose sight of that. So I encourage entrepreneurs to go back to that and understand what success looks like and what are the best ways to achieve that.

When you're thinking about it realistically, chances are, you will not have all the resources to best achieve this mission. Even when you look at the probabilities of success, for every IPO, there are 30 acquisitions each year, so chances are, you're going to get acquired. M&A is almost inevitable, and you will either be prepared for it or you don’t. 

We prepare for everything else, but very few entrepreneurs think about their exit ahead of time. Usually, they get into exit strategy discussions when they are either talking to an acquirer who's made an inbound inquiry, or they're running out of money. And both situations are too late for you to take the proper steps. 

What I learned on the acquirer side is that it takes at least a year or more for you to build the kind of meaningful relationships that are conducive to great strategic partnerships and deals. 

The other thing is, when you have an exit strategy in place, you build your business in a way that helps you manifest that end scenario. 

This is what we did with my second startup. We had a wishlist of acquirers, we had a strategy offsite. Then we started thinking about how do we prioritize the potential acquirers on this wish list. What are the criteria we'll use to choose one over the other? What do we do to establish relationships with them? 

So just having gone through that exercise, within a span of two years, we went from 10 million valuations to over a hundred million valuations, being pursued by multiple acquirers. 

Building Relationships

The relationships are critical. Companies don't do deals, people do. So it's good to get to know the people that do the deals. And there is a bunch of different things you can do actually to improve your leverage as an entrepreneur. 

A lot of times, we assume that a small, tiny startup cannot have leverage against a giant, multi-trillion-dollar company. But the truth is you can have leverage, but you need to cultivate and build that leverage over time. It takes time. 

And part of having that leverage comes from having capabilities and having folks on your team that can give you the bandwidth to execute on a deal and have the right kind of brain around you: such as lawyers, investment bankers, or advisors. All of those are necessary for successful deal execution.

Real-life Stories

My first startup Jaxtr started in 2005. We're a promising hot startup in the communications space. We're doing what WhatsApp and Telegram are doing now, but this was in the prehistoric pre-iPhone era. So we were trying to connect folks through the internet and messaging and phone calls and bypass the telephone network. But these were with phones that didn't have apps on them.

Still, we grew virally. We went from zero to 10 million users within a span of a year of launching. We had VCs chasing us down the street. We were so confident of our execution that we thought we had a unicorn here in the making. 

We wanted to build a billion-dollar company. We were going for that IPO. And therefore, we didn't really seriously go out of our way to establish strategic partnerships or really build relationships with potential acquirers.

Then 2008, 2009 hit and there was a downturn. Suddenly, no more venture money, and we had less than a year to figure out what to do with the business. In fact, when we looked at the numbers correctly, we had only had six months of runway. 

We tried very hard to find an acquirer and there was only one party who basically dictated their own terms. And we barely got pennies on the dollar. So it was a failure from an objective standard. 

At the next startup, I actually joined as a Head of Corp Dev and Strategy with Webs.com, I did not start that company, but the company reached a place where they were at a strategic inflection point. They were kind of plateauing a little bit and they needed to see what to do for the next phase of the company.

And that's when I got everyone together and we did a strategy offsite to really think about what real success looks like. And in the very likelihood that we would be acquired, who would be on that wishlist that I referred to? And that sets a series of events that led to that successful exit.

When you have that framework and that exit plan in the back of your mind, you can start at events, you start meeting people, you start connecting the dots, you start meeting people who can be advisors. In fact, one of the critical advisors we had was someone I bumped into at a conference. 

His advice and mentorship was critical and many other relationships that came about because psychologically we were primed to think about the exit. 

How to create an exit path?

Creating that exit strategy has a number of ingredients.

1. The right mindset - You need to get over these myths and taboos around exit planning. There's this myth of acquisitions often fail so why bother pursue them?
   
   Also, there’s this fear that if you tell your investors about the exit plan, they might think there’s a problem and that you’re not passionate about the mission and building a massive company.
   
   But can't create an exit strategy unless you can have an open dialogue with your investors and key stakeholders because it's not something you do alone.
   
   You need their involvement continuing over time and their support. You have to adopt the mindset, understand what does it really mean to have an exit strategy and why is it on strategy for your business even when you don't need to sell.
   
   In fact, the best time to sell is when you don't need to sell. So creating a sustainable business is part and parcel of creating one that can be sold successfully. 

2. Build an exit strategy canvas - this is a byproduct of offsite meetings. And having the right people, the right prep works done, the right setting, who should participate, and what sessions do you have as part of the agenda? 
   
   Then, you will have the ingredients to create your exit strategy canvas. And this becomes a documented one-pager similar to business model canvas, which was inspired by that, but it's for exit strategies.
   
   And this is a living document that you will revisit every now and then. Continuously update if needed. 

3. Enter the long game - take steps to build relationships, build leverage, build your deal team and let that mature over time. It's not an all-out upfront effort. It's just something that you take incremental steps towards.

4. Enter the short game - once you are ready to sell, there are ways to evaluate whether or not it's the right time to sell. Look at the pros and cons as there are risks involved.
   
   Just because you are ready to sell, doesn't mean you will end up successfully selling. There are other sorts of things that can fall out from that.
   
   And then there are ways to actually get buyers at the table, cultivate their interest, bring urgency to the deal, and actually start getting term sheets and it takes a village to make all these possible. 

Exit Team

Each one plays a critical role. Bankers and lawyers are very important. Lawyers are great at identifying risks and helping you basically protect your downside. There is a lot of very complex terminology. They may seem simple but could be very deceiving. But they're not that great in maximizing the upside for you. 

This is where deal advisors come in. they are more business-minded and will help identify opportunities and ways that you can position yourself to get the best terms possible.

If it's a larger deal, get an investment banker. One mistake people make about investment bankers is that they're not the ones that are going to build the relationship and bring the initial interest to you.

You have to cultivate those yourself, but they're great at running the process and making sure you get the best deal terms possible, and also preserve your relationship with the acquirer and be the middle person that does a lot of the negotiation. 

As an entrepreneur, you want to be behind the scenes to avoid the adversarial back and forth of negotiations. 

Also, one thing that people forget is your own leadership team's capacity and capabilities. Acquisitions tend to be highly time-consuming, and whoever gets sucked into the vortex of a deal will not have that much time to work on other things. 

So you don't want your business to go off the rails while you're in negotiations with acquirers because that will really hurt you. In fact, it may blow up the deal. 

So you want everything to continue in your business even while you're in negotiations. So you do need to have that second-tier level of management there in place, capable folks who are able to make sure the business is running smoothly.

How would M&A Science start?

Start with networking. It’s important that you appear on their radar, and vice versa. You don't want to engage them yet until you're much more advanced into your process and you have perhaps inbound interest, or you have the indication that you're getting folks interested to make a play here.

You can also get into the mailing list and newsletter list so that you can start seeing what other deals that are happening, getting a sense of who are the typical acquirers in your space and who are some of the folks that you need to be building a relationship with on the side of the acquirer.

And it's not just one person. You can’t just rely on the corp dev guy. These big companies have multiple stakeholders and usually, folks rotate around teams. You don't wanna lose your chances with an acquirer because your contact took a different job. You want to have multiple touchpoints inside the company. 

But it also depends on the size of the company. If they are too big, CEOs are not realistic. But there's tier of general manager, product managers, folks who are actually really for whom you would make a big difference in the company, I think you need to identify them and make them a champion.

Most acquisitions are not top-down. They come from someone internally being your champion and saying that I need this. This will accelerate and change the game for you. 

Don’t rely too heavily on corp dev. Corp Dev is helpful. But they are more of a support function. No offense. I don't mean it in a value judgment way, but Corp Dev is a support function just like legal and accounting and finance are support functions within an organization. 

They're there to support the business units. And the real agenda of what this company should acquire is set by the business units, by people with P&L responsibility. Because Corp Dev, once the deal is done, they move on to the next deal. 

They can advocate for a transaction, but the real decision makers, those with authority, power, influence, et cetera, are outside of the Corp dev team. So we need to recognize that. 

So the best way to leverage Corp Dev is to make a positive impression on them, build that relationship, but then leverage that relationship and identify who is the right person who can advocate for me and put their signature behind this deal.

Reaching out to Bankers

Most people who have tremendously impacted my life have come through referrals. There are outliers, people I have bumped into at conferences, but most of them have come through referrals. 

If you can network your way to finding who the highly sought after and who the competent bankers, brokers, agents, et cetera, then it’s good. 

And if you don't, I would encourage you to still do reference checks on whoever you talk to, and find out some of the deals they successfully managed. 

Leveraging Options

Options create value. We all know you can't just have an option for free in the stock market, like strategic options for your startups. You have to invest in it and cultivate those options.

One of the best options you could have is to reach cash flow breakeven because then you're not desperate to sell. 

When we were in our M&A conversations with webs.com, we were cash flow breakeven. But we were facing a strategic fork: raise more money and get diluted and delay the inevitable exit, and the company had already been in business for eight years or so. 

Or the alternative was to sell and avoid that dilution, but then you have to find what the expected trade-offs are. Sometimes it's much better to take the cash now or to exit now than to roll the dice and wait for another four, or five years and see how the economy turns then. 

So there's that kind of financial calculation, then there's the whole strategy and a mission. That could be very compelling. 

But fundamentally, acquisitions happen because when these three things come together, you have a willing seller, you have a willing buyer, and a set of terms that you guys can all agree on.

And if you find the conditions to be conducive around all three, then that's probably a good time to sell. 

Sourcing Buyers

I have never seen a very successful process where there wasn't a preexisting relationship between the seller and at least one or two buyers. 

I always got bad vibes whenever an entrepreneur came through an intermediary like an investment bank or broker would send us their business plan instead of the entrepreneur themselves pitching to us. 

I would always prioritize nurturing relationships with companies. Because also, there could be many other interim steps you would take, like a strategic partnership, co-marketing, joint venture, and other things, and they could have been an investor. 

It's not just about the sale and exit, but it's also about creating this ecosystem of relationships that could lift you as an entrepreneur, as a company, have more folks pulling for you, and be allies to you as you explore a market. 

Secrets to Deals

If you already have the relationship, think of an indirect way of telling people you are for sale, instead of putting up a sign that says I'm for sale.

One that I've found extremely useful is raising money. Because savvy acquirers realize that this is a time that you're actionable. I have personally jumped to action many times when a company that I've been in conversations with all of a sudden said that they're raising money. 

Sometimes they would ask me if we wanted to invest. My antennas would be up because if we want to make a move, now is the time or we're not going to be able to have this asset for another four or five years because their valuation is going to be higher, and their expectations, their investors not going to sell right after they invested. 

One of the rules that I encourage people to follow is, of course, to always make sure you prioritize the relationship.

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