Press on Early Exits
Early Exits by Basil Peters (read at Inc.com)
"Written by a seasoned early-stage investor, Early Exits is a must-read for any entrepreneur who has wrestled with the dilemma of taking outside funding. Peters makes the case that marching toward an exit is a good thing, and not nearly as impossible as it may seem. A surprising number of business owners are cashing out after only two-to-five years and for between $5 million and $30 million, he asserts—making this period, for all its turbulence, a golden era for entrepreneurs. (An e-book format is available on the author's website)
Recommended by Bo Burlingham."
From Forbes, August 22, 2014 (read at Forbes.com)
"Is it rude to think about how to leave someone the first time you meet him? Perhaps. But in the risky world of angel investing, top angels think about the exit the first time they meet the entrepreneur.
Angels want to know that the CEO of the business they are investing in understands which companies could acquire them and why. They want to know the role they and other investors like venture capitalists (VCs), will play in an exit. Starting the relationship on common ground decreases the chance of an exit derailing later.
Sophisticated angels know that one investment in 10 provides nearly all of their returns. Driving a successful exit helps to increase the odds of a favorable investment return. While some angel investors can do this on their own, many benefit from joining an established angel group, which brings the power of many experienced angels to lead investments, serve on company boards, and help drive excellent exits.
Dr. Tom McKaskill, in his book, Ultimate Exits, advises entrepreneurs to "Start the process by thinking of your business as a product you are going to package for a very selective customer…the buyer who will pay the highest price."
- Is there exit goal congruence between the investors and the entrepreneur?
- Who will drive the exit - angels or VCs?
- Can they do so successfully?
To determine if there is exit goal congruence with entrepreneurs you are considering investing in, Huston suggests sharing data on recent exits in their industry and region. The data discussion opens eyes and builds understanding, as many entrepreneurs plan on an unusually large exit such as Facebook’s recent $19 billion acquisition of WhatsApp but a $50 million to $200 million is more likely.
Then ask: "If we decide to invest in your company we will work really hard with you over the next three to five years so that we can sell your venture and put X-many millions of dollars in your pocket, is that an adequate outcome for you and your family in light of all the hard work ahead?"
If the answer is yes, proceed with due diligence.
Another question to ask before investing is whether venture capital is needed for a successful exit – and what that means to you as an angel investor. Companies requiring millions of dollars will need to attract VC money later, and it is important to understand the consequences. Ask:
- Can we raise the requisite angel and VC capital with this CEO?
- Which angel director will ensure all non-dilutive sources of capital have been accessed?
- Can the lead angel drive the exit?
- Which directors have raised VC money in the past?
- How does bringing in VCs impact the ultimate exit?
Don’t automatically assume VC goals are aligned with angels' goals. Understand that not only may your investment get diluted as VCs put in later and larger investments, and that VCs may have different ideas about company leadership or an exit. It is important to vet the VCs to avoid exit disagreements between entrepreneurs, angel directors and VC directors.
After making an investment, lead angels will be asked to drive returns and the exit. Angels wanting additional training in this area should consider using the resources of an angel group or professional association. For example, Golden Seeds offers a "Coach to Exit" course and the Angel Capital Association offers sessions at its professional conferences. Three books also provide great advice:
- Early Exits by Basil Peters
- Strategic Entrepreneurism by Jon Fisher
- Ultimate Exits and workbook by Dr. Tom McKaskill
Plotting a successful strategic exit requires identifying the appropriate "customer" for the business. Is the entrepreneur looking to sell to financial or strategic bidders? It's important to understand the difference. While financial bidders are concerned mainly with growing earnings, strategic bidders will ask how the acquisition leverages their assets and capabilities and assess what happens if their competitor acquires the company.
Angel investors have much to gain by supporting innovative startups. Just remember, before jumping in, ask the important questions about exit strategies to increase the odds of success.
Marianne Hudson, Contributor"
From The Globe and Mail, August 24, 2009 (read at the Globe and Mail)
"I'm sitting in the meeting room of our office, on the 33rd floor of Vancouver's Bentall IV tower, overlooking Stanley Park and the North Shore mountains on a sun-drenched afternoon. With me is Bill, a client and long-time business owner. We're putting the finishing touches on a plan to sell the business he has headed for more than 20 years.
We started Bill's exit plan a little over three years ago. Now that it's time to review the offers (he's narrowed it to two with his lawyer/accountant), Bill has become reflective. He looks out the window, taking in the sea and sky. "It's the end of a long road," he remarks. "And the start of another one."
Bill's insight has stuck with me. For many owners, the sale of their business is both an end and a beginning. It's the culmination of years - often decades - of hard work, and the gateway to a life of fulfilment and greater meaning.
At least, that's the way it's supposed to be.
The hard truth is, business exit planning is something many entrepreneurs don't do well. In my experience, there's often a lack of understanding, attention and urgency when it comes to planning a business sale. The result can be a good deal of frustration, and considerably lower sale prices.
One person who agrees with this assessment is Basil Peters. A computer engineer by training, Dr. Peters has successfully founded and sold a half-dozen engineering and technology companies. Currently, he's the manager of an angel investment fund that provides promising high-tech startups with seed capital.
Last month, he added the title author to his resume, with the publication of Early Exits: Exit Strategies for Entrepreneurs and Angel Investors (early-exits.com). The book describes some of the insights he has gleaned from his own exit experiences, and provides detailed exit planning advice for other owners.
"For most owners, selling the company is the biggest transaction of their lifetimes," Dr. Peters says. "Unfortunately, most owners get less than they could - often many millions less. The biggest reason is that they didn't have a good exit strategy. A well-designed and executed exit transaction often adds 50 per cent to the final selling price."
As he explains, owners are often too busy building their business to think much about leaving it. "Exits are the least understood part of being a business owner," he notes. "Managers will often develop and execute dozens of product strategies, financings or sales plans during their careers. But even veteran managers will only be involved with a few exits."
The solution is to think of the end right from the beginning. "In many cases - possibly the majority - owners wait too long to exit," he says. "Ideally, companies should have a written exit strategy before the company structure is complete, and certainly before the first financing. A clear exit strategy will literally affect business decisions made almost every day."
Someone who knows the power of a well-considered exit strategy is Eric Andrew. As the managing partner for private company services in Canada at accounting giant PricewaterhouseCoopers, Mr. Andrew has helped dozens of entrepreneurs exit their businesses in the past 30 years.
Not surprisingly, when it comes to exits, he's a big proponent of planning ahead. "It's never too soon to start the process," Mr. Andrew told me in a recent conversation. "It doesn't matter what industry [you're in] People just do not get down to focusing on it soon enough."
He identifies three critical actions behind successful exit plans:
"The absolute first thing you have to do is figure out who is going to buy your business," Mr. Andrew says. There are many options: a family successor, a management group, a competitor, a private equity firm, a royalty group. By identifying potential buyers early, owners can start making the business more attractive to those specific buyers.
Make it attractive
Once potential buyers have been identified, owners need to make their business as attractive as possible. "You've got to get your head into thinking like a buyer," he explains. "What's a buyer going to look for? If [you]can tick those boxes, then you're going to get a completely different value out of the business."
Make it sustainable
Entrepreneurs usually take on several roles within their businesses. To buyers, that's a problem. "If the person who's the brains behind the show is leaving, then the business is worth very little," Mr. Andrew points out. Instead, entrepreneurs need to focus on grooming management and securing relationships with clients, suppliers and financers so the business can survive after they depart.
Exiting a business isn't easy. Nor is starting a business. In both cases, success is primarily a product of planning. The sooner that planning starts, the easier it is to travel the long road to financial success.
Thane Stenner is founder of within GMP Private Client L.P., as well as Managing Director, Private Client. He is also bestselling author of ´True Wealth: an expert guide for high-net-worth individuals (and their advisors). The opinions expressed in this article are the opinions of the author and readers should not assume they reflect the opinions or recommendations of GMP Private Client L.P. or its affiliates."
Exit strategy essential for entrepreneurs
The Okanagan Saturday, June 2, 2009
"Some companies should be started with the ending in mind.
'Yes, entrepreneurs should definitely think exit as they start a company,' said Early Exits author Basil Peters during a stop in the Okanagan this week.
'If an entrepreneur and a company has an exit strategy right from the beginning, then they tend to be more successful and reach their goals sooner.'
The key with exits is to sell when times are good."
Find the PDF of Steve MacNaull's piece here.
"Now that the recession shows signs of ebbing, small-business owners should evaluate their strategies and think about ways to improve their companies' competitive positions."
Here are nine books that might inspire you:
Winners Never Cheat -- Even in Difficult Times (Wharton School Publishing 2008) by Jon M. Huntsman, a self-made billionaire. Huntsman discusses how to build a successful career by following your moral compass in this updated version of his earlier hit.
Inspire: Why Customers Come Back (FT Press 2009) by Jim Champy. Businesses that manage to retain customers will probably survive the recession. This book provides ideas on developing new products, picking the right sales partners and improving customer relations.
From Lemons to Lemonade: Squeeze Every Last Drop of Success Out of Your Mistakes (Wharton School Publishing 2009) by Dean Shepherd. This book provides examples of how companies learned from their mistakes to build great products that sell.
Work Wanted: Protect Your Retirement Plans in Uncertain Times (Wharton School Publishing 2009) by James W. Walker and Linda H. Lewis. This book helps retired professionals get back into the game.
Four Seasons: The Story of a Business Philosophy (Portfolio Hardcover 2009) by Isadore Sharp. Unlike the Marriotts, Hiltons and Trumps, Sharp isn't a name people readily know, yet he developed one of the finest hotel chains in the world, the Four Seasons Hotels and Resorts. Sharp started with motels, but shifted toward luxury after realizing that people were willing pay for the best. This book talks about what it takes to target the high-end market and how to provide superior customer service.
Early Exits: Exit Strategies for Entrepreneurs and Angel Investors (Meteorbytes 2009) by Basil Peters. Peters is an experienced venture capitalist, who recently spoke at the Angel Capital Association conference. The book is focused on exit strategies, the top concern when an investor writes a check. It's a good read about what entrepreneurs should ask for and expect from investors.
Marc Kramer, Special to TheStreet.com
Marc Kramer, a serial entrepreneur, is the author of five books and is an instructor at the University of Pennsylvania's Wharton's Global Consulting Practicum, where he serves as Country Manager for Chile.
The Frank Peters Show
"For early-stage angel-backed deals it's been a measure of success when VCs come along and invest in the next round."
Angel investor Basil Peters suggests we re-think that outcome, 'I think that there are things that have changed which angels should think carefully about, in developing the financing strategy for the companies in which they have invested and, even more importantly, to think about before they make their next angel investment.'
As VC funds have grown to an average of $300 million, this means the math for each deal 'increases the minimum exit valuation... probably into the hundred million dollar range.' Angel investors will be waiting for years for these exits.
Basil discusses his new book: Early Exits, Exit Strategies for Entrepreneurs and Angel Investors (But Maybe Not Venture Capitalists). It'll make you think..."
"Fascinating pair of events in Atlanta this week… the DLA Piper “Venture Pipeline” and the Angel Capital Association annual summit. I’ve learned a bit, and have definitely gotten a few ideas to think about.
No surprise to anyone who’s active in the startup community… investment in early stage companies is down but not out. Deals are still getting done. And the most savvy investors realize that prices of early-stage equities are as cheap now as they will be for a long long time… it’s a good time to buy.
(That’s not the greatest news for the entrepreneurs, but don’t let it stop you. Waiting for valuations to go up just means you’re letting your competitors run unopposed.)
The most interesting discussion so far was led by Basil Peters. He’s crunched a lot of numbers in writing his book “Early Exits” and come up with some non-intuitive conclusions.
First, check his premises:
- Venture economics dictate that VC funds must have a certain number of home runs to make up for the number of deals that simply go broke.
- The average size of a venture fund has grown from $100M to $350M in ten years. That means the home runs have to be bigger… as a rule of thumb, you probably need to exit at $200M to “move the needle.”
- The angel market has matured so that syndicates of angels can now invest $3-5 million over the life of a deal.
- The rise of cloud computing, SaaS, Asterisk, BPO, and other outsourcing services means that many companies now require an order of magnitude less capital than they did a decade ago. (Not true for biotech, but certainly true for software startups!)
- The IPO market for venture-backed companies is dead. Thank you, Sarbanes-Oxley.
- 92% of U.S. M&A exits are for less than $20 million.
- Related: The number of potential acquirors is much larger for a $20M purchase than a $200M purchase. As Basil relayed, a Fortune 500 friend of his said “I can get a $20M deal approved at the divisional level. A $200M deal requires the board of directors, and that’s not going to happen right now.”
Any issues on that list? Any one of them is probably worth a blog post, but it’s hard to argue with any of them as representative of the current situation in 2009.
And one item that Basil didn’t point out, but it’s probably in his book:
- The death of the IPO market means that participating-preferred shareholders (meaning VCs with liquidation preferences) will get a disproportionate amount of cash out of an M&A transaction.
Alright, toss all that in a pot and simmer. What do you come up with?
The interests of angel investors and venture capital investors are inexorably diverging.
That’s a big deal. It has the potential to change the dynamics of the entire early-stage investment market.
I’m typing this sitting in an ACA session on the current angel market. The angel and VC markets have always been synergistic, and somewhat intertwined. Getting a VC to invest in your early-stage firm has always been a “seal of approval” for your angel investment, and 62% of angel deals last year attracted VC funding. Some angel groups won’t invest in a company if they can’t convince themselves that the deal will attract VC money. A lot of senior or emeritus VCs are active individual angels. Now, VCs are even inviting top-end angel groups to join their Series A syndicates.
And Basil claims that it’s all headed for divorce.
Venture Fund Economics
The economics of a venture fund are pushing them towards deals where they can put at least $5M to work. Do the math: a 10X exit means the VC equity has to be worth $50M; if they own a quarter of the company, that means a $200M acquisition. And deals are taking longer… the DLA Piper presentation emphasized that average holding period from Series A to liquidity has grown from barely two years during the Bubble to over eight years today.
Ten-year funds aren’t ten-year funds anymore. The average ten-year fund doesn’t wind up until Year 14, and a non-trivial fraction last until Year 18 or even longer.
Time is the enemy of VC firms. The longer you hold the equity, the higher multiple you need to hit your IRR target (and venture firms live and die by IRR). Waiting until Year Seven for a 10X exit that you expected in Year Five means your portfolio IRR can drop from 35% to 20%. That may be the difference between raising a new fund and being invited to explore other career opportunities.
So all the forces are pushing VC firms to do bigger deals, that consume more capital, that deliver the potential for ever-higher multiples. 10X may not be enough… maybe your target now needs to be 20X, or 30X. You’re swinging for the fences every time.
If you’re an angel investor, this may not be a good idea.
If you can put $2M into an angel investment over two rounds and sell your stake in Year 3 for $6M… that’s only a 3X multiple, but a a 54% rate of return! If you own a third of the company, that means an $18M acquisition… as mentioned above, that can be done as the divisional level at many, many large companies.
No substantial VC is going to be interested in a deal that sells for $18 million. “Doesn’t move their needle.” “Failure to launch.” If they have one of these in their portfolio, its counted as a failure.
But if you’re an angel investor, investing your personal capital, that’s a darned good deal! It’s not going to let you retire to Cayman Brac, but it’s certainly going to pay for some nice trips and toys.
And for those of us concerned about economic development and technology-investment ecosystems… the funds from that exit are available for reinvestment in the next deal much more quickly! Once the angel is back from a three-week golf trip or dive trip or whatever, he or she has substantial liquidity available, and is likely to want to do another deal, and another… and probably in the same local market. By contrast, the VC fund exit, whenever that occurs, gets distributed back to their institutional LPs. With all the chaos on Wall Street, who knows when, or if, that money will ever make it back to the local market?
The conflict arises if you are the angel investor looking at a potential $18M acquisition, but you’ve taken VC money. As seen above, the VC is pre-programmed to need a $200M exit. The VC syndicate is going to control the board, and they’re likely to “double down”… rather than taking the early exit, they’ll plow in more money (most VCs have plenty of money), maybe try to roll up a competitor, and build that $200M exit. If they miss, the deal goes into their list of writeoffs. And it’s probably too late to go back and make that $18M sale that was available four or five years earlier. That potential acquiror has moved on.
Basil quoted a study by Robert Wiltbank of Willamette University (funded by our indispensable friends at the Kauffman Foundation). He looked at a large historical database, and compared results for companies that only received angel investment versus companies that received a mix of angel and VC dollars.
When angel investments attracted VC dollars, the overall number of exits in the 5X to 10X range increased by about 8%. That’s good.
But the number of exits in the 1X to 5X range fell by nearly 20%. That’s bad.
And the number of complete failures increased by about 12%. That’s terrible. How many of those companies would have had solid “base hits” exits if the venture investors had not been swinging for the fences?
Impact on Entrepreneurs
So if you’re an entrepreneur… what does all this mean for you?
It depends. (The answer to almost any reasonably complex question is usually “It depends.”)
If you’re discovering pharmaceuticals or building medical devices, nothing changes. Structural issues in your market, such as FDA approval, will continue to drive you towards raising large amounts of venture capital from VC firms.
If you’re developing a new Web 2.0 service… you might want to think about an angel-only strategy. Your likelihood of a profitable exit goes up, even though the likelihood of being on the cover of Wired goes down. Make enough money to fund the next company yourself… and that one might get you on the cover!
And if you’re in another sector… well, it depends. Cleantech deals are looking more and more like biotech (heroic amounts of capital, long holding periods). Some software deals may begin look like SaaS deals, where you can run them on a relative shoestring. It’s certainly worth understanding these dynamics before you start mixing streams of angel capital with venture capital.
Venkman said “Don’t cross the streams!” It’s still good advice.
How I Nearly Blew the Biggest Deal of My Life
EO Octane June 2009
"As an entrepreneur, fund manager and veteran of business sales, there is one thing I know to be infallible: Exits are the least understood part of being an entrepreneur. I know this because I almost blew it when I sold the first company I co-founded. It wasn't until I had completed another five or 10 business exits that I understood all of the things I did wrong."
About Basil Peters' new book: Early Exits
"Basil Peters, noted British Columbian investor and entrepreneur, has recently authored a book titled Early Exits: Exit Strategies for Entrepreneurs and Angel Investors (But Maybe Not Venture Capitalists).
The author's intent for this book is to fill the gap that exists between currently available books for retiring entrepreneurs looking to sell out, and venture capitalists who may control all the terms and conditions of an exit from the start.
According to Mr. Peters, exits are often completed when companies are only two or three years from startup, and the largest number of exit transactions today are in the under $30-million valuation range. As the fund manager for Fundamental Technologies II, an angel investment fund in British Columbia, Mr. Peters can draw upon a wealth of personal experience to deliver a rewarding read."
"Exit opportunities have changed dramatically over the last few years. Basil Peters, fund manager for Fundamental Technologies II (an angel fund) and member of angel groups in Canada and the US, encourages angel investors to recognize that the opportunity for earlier exits exists and to build strategies to capitalize on it.
ARI: Your book, Early Exits, will be coming out in a few weeks. It is about angel investors and entrepreneurs creating more successful, more frequent, and more profitable exits. We take it you aren't writing about IPOs?
BP: No. I'm talking about $10 to $30 million exits for angel-backed companies that are often less than five years old when they are acquired by corporations.
ARI: On your blog and in your book, you point out several converging trends that are making these types of exits possible.
BP: We are in the midst of several big shifts in the economy. We have reached an evolution in the high technology industry where entrepreneurs can build valuable companies with almost no capital. Companies can be started on a shoestring and grow to be quite valuable in just three or four years.
When I got out of graduate school, we were in an era where most technology companies were building physical products. To be in that business, companies like Hewlett Packard and Intel needed thousands of people and hundreds of millions in capital. Then in the nineties, Microsoft, Sun, and Oracle built large companies based on software and applications, and that also required thousands of people and hundreds of millions dollars.
Today you can buy a computer as big as the ones that used to run an entire university for about $300. Software that used to take 100 engineers years to build, you can download from the Internet for free. This means that a few talented entrepreneurs with almost no money can sometimes build a useful online business in a weekend.
ARI: Who is buying these early exit companies?
BP: Large corporations are big buyers. To use one of my favorite quotes: Big companies stink at innovation, and they know it. They are much better at buying technology than developing it in-house. Big companies have money, and they are putting it to use buying younger companies.
A lot of these transactions are done without announcement. In many cases, the price never gets into the public domain or may end up being a small footnote in the acquiring company's annual report.
ARI: Typically, how large are these exits?
BP: Mergerstat (www.mergerstat.com), a large merger and acquisition data base, reports that the median price of private company acquisitions is under $25 million. From my experience, I estimate it to be well under $20 million if you factor in the transactions where the price is not disclosed.
Big companies believe that their sweet spot is to acquire $10 to $30 million companies and grow them into $100 to $300 million business units. The combination of all these trends has brought us to a wonderful point in the technology industry where angels and entrepreneurs are making excellent returns in very short times.
Up near where I am in Canada, a company called Club Penguin was started by three software guys to address the children's online game business. They had no outside investors and sold it in just two years to Disney for $750 million. They were brilliant bootstrappers and cash flow managers.
ARI: Do you think that the reality of an active mergers and acquisition market for under $30 million companies has worked its way into the angel and entrepreneur mindset?
BP: Angels are starting to get it. Entrepreneurs, not yet. The typical thing I see in investor presentations is some enthusiastic entrepreneur who says, "I'd like to raise money from angels today, then in two or three years raise a venture capital round and have completed an exit by five to seven years from now." That almost guarantees that I won't invest.
ARI: You object to investing with VCs?
BP: It isn't that I have something against VCs. I don't. I've been a VC. I just believe that it is more that the fundamental DNA of entrepreneurs and angels is compatible, but its much less so with VCs. The big trends are also not moving to favor the traditional VC model.
Why? Because venture capitalists usually enter later in the company's life cycle and need to invest at least $5 million. If the company is doing well, traditional VCs wont let the company be sold unless they are making at least a 10X return on their investment.
That means that the minimum price you can usually sell for is over $100 million. While big companies can afford to buy companies for over $100 million, they don't do it very often. These are very rare events - especially today.
When a VC invests, it resets the exit clock for the entrepreneurs and angels. It is hard to make a 10X return in less than 10 years - especially in the later stages when VCs invest. That means the entrepreneur is often in the company for more than 15 years and the angels for 10 to 12 years. I'm seeing fewer and fewer angels who want to lock up their money for that long. Today more investors are interested in opportunities where entrepreneurs say they are going to drive to a liquidity event in three or four years.
Entrepreneurs have a much higher probability of success if they target $10 to 30 million exits. The M&A market in this value range is still surprisingly strong. This is a perfect fit for angel investors.
ARI: That would make it very important for entrepreneurs in these businesses to be aware of angel groups.
BP: Absolutely. The finance team in these companies has to know how to find angels and keep them informed about how the company is progressing. They should also be aware that angels are more comfortable co-investing these days. I have seen several angel financings for over $5 million.
ARI: It sounds like one smart option for angels is to work entrepreneurs to create an early exit, for the entrepreneur to start another company, and for the angels to re-invest their capital.
BP: Yes, exactly. When there is a convergence of major trends like this, it can get very exciting. I believe the next several years will turn out to be very good times for entrepreneurs and angel investors.
ARI Team, Angel Resource Institute"