INSUBCONTINENT EXCLUSIVE:
Benjamin JoffeContributor
Benjamin Joffe is a partner at HAX
More posts by this contributor70 years of VC innovation2017 crowdfunding guideThe dream of a startup founder can often be summarized by the
following well-intentioned, and mostly delusional, quote:&We&ll raise a few rounds and in a few years we&ll IPO on Nasdaq.&But a more likely
scenario looks something like this:You invest a few years of hard work to build something of value
One day you receive an acquisition offer out of the blue
You drop everything to focus on this opportunity
Exclusive due diligence starts
Your company is a mess (IP, contracts, burn)
Days become weeks; weeks become months
You&ve neglected business and fundraising
You&re running out of money
MA is now your one and only option
The buyer says they found a bunch of cockroaches in the walls and drops the price
Now whatSound unlikelyThis is still a favorable situation: You had an offer! Think about how much time you invested in your various funding
The hundreds of names and Google spreadsheet or Streak-powered quasi-CRM process.Have you spent even a fraction of that on understanding
exit paths If you&d rather not live the situation described above, read along.The E-word: A strange tabooInvestors live by exits, but many
founders keep dreaming of unicornization and avoid the &E-word& until it too late
Yet, in 2016, 97 percent of exits were MAs
And most happened before Series B.Exits matter because that when you, your team and your investors get paid
Oddly enough, and to use a chess metaphor, we hear a lot about the &opening game& (lean startup) and the &mid-game& (growth), but very
little about this &end game.&As a result, founders miss opportunities or leave money on the table
Our fundhas more than 700 companies in portfolio
We want the best possible exit for each of them
And fortune favors the prepared! Now, how to get 700 exits (and counting)To explore the topic, we organized a series ofMaster Classes
tappingcorporate buyers, bankers, investors, lawyers and startup CEOs with MA or IPO experience in San Francisco
It was a group thatincluded the founders of Guitar Hero—  bought by Activision; JUMP Bikes—  a SOSV portfolio company bought
by Uber, Ubiquisys—  bought by Cisco and Withings—  bought by Nokia
Each one for hundreds of millions.Their observations can be summarized below.Maximize optionality&Founders must be aware of what contributes
This means understanding partnerships and how they are formed in the business space the entrepreneur is working in,& said one Master Class
participant.As founders, you build your product, your company and… optionality
You need to understand the options open to your company, and take steps to enable them.The most likely one is an acquisition, but there are
others like IPO (including small cap), RTO, SBO, LBO, Equity Crowdfunding and even ICO.&Exit is not a goal ​per se, but as a CEO it is
something you should think about as early in your cycle as possible, while being business-focused,& said the London-based investor Frederic
Rombaut, of Seraphim Capital.Indeed, most participants said that exits should always be on the chief executive agenda, no matter how early
in the process.&Exits should be on the CEO agenda
Not front and center, but on the agenda
MA is a by-product of a great business and targeted BD
IPOs are always an option once you&ve built significant cashflow forecasting.&It important to ask questions like: How many &strategic
engagements& with potential buyers have you had this month Is your message and value clear in their eyes Have you considered an acquisition
track in parallel to a fundraiseIt doesn&t stop there:Equity crowdfunding might help close some gaps at seed stage.Early IPOs on smaller
exchanges can be an option to raise over $10 million —  the robotics startup Balyo went public and raised €40 million on Euronext
to get rid of a critical &right of first refusal& option held by one of its corporate investors.Reverse mergers can work too: the medical
exoskeleton company EKSO Bionics went public this way.One thing is sure: The time to exit is not when you&re running out of money.Companies
are bought, not soldUnicorn or not, the most likely exit is an acquisition.As George Patterson, managing director at HSBC in New York said,
&Good tech companies are bought, not sold
The question is thus: how to get bought&Patterson says it important to understand how mergers and acquisitions actually work; how to prepare
a startup for an exit; and how to develop a &feel& for the market you&re exiting through and into.How MA worksHearing from corp dev veterans
from Cisco, Logitech, Dassault and IBM, a few key ideas emerged: Motivations varyIt could be from least to most expensive, or as a mix, as
listed by Mark Suster, managing partner at Upfront Ventures:Talent hire ($1 million/dev as a rule of thumb —  location
matters)Product gapRevenue driverStrategic threat (avoid or delay disruption)Defensive move (can&t afford a competitor to own it)How
corporates find youCorporates find deals via the development of partnerships, investment (CVC), their business units, corp dev research,
media and investor connections.Asked about the best approach, ToddNeville, manager of Corporate Business Development and Strategy at IBM
(who gave the most detailed description of the corp dev process), said, &Do something cool to one of the IBM customers
If they rave about even a POC, we&re interested.&In other words, business development is corporate development.Get the house in orderBuyers
typically want to know three things:Is your IP really yoursIs your team capableWill your customers stick aroundFor IP, they will check your
contracts (staff and contractors), and run some automated code analysis for proprietary code and open source use
They will evaluate potential IP infringement
No point buying you if you end up costing more in lawsuits!For your team skills: Sitting down with your engineers will tell them plenty
enough without understanding the details of this or that algorithm
The last thing a corporate wants is to be accused of stealing!Lawyers engaged early can help
The later the clean-up, the more costly and painful.Develop a feel for your &market&Develop relationships and create champions within
It will help promote your deal when the time comes, and will let you keep your finger on the pulse of corporate strategy to time your
moves.Do you read the earning calls of Cisco or IBM (or others relevant to you) This is where strategies are presented
Are your keywords coming up there or in their press releasesChris Gilbert, former CEO of Ubiquisys (sold to Cisco for more than $300
million) was very deliberate in planning his exit
&Selling starts on day one and is a leadership-only function —  work out who will be your buyer
Constantly articulate why a company should buy you,& Gilbert said
Bring clear messages into the acquiring company so it can be presented upwards: give them the presentation you would like them to show their
boss! When the time is right, force decisions through competition
If you know they have to buy you, your starting position is strong.&The dark art of price discoveryThere are dozens of formulas (from DCF to
comparables) to evaluate a deal —  which also means none is &correct.& What matters is: How much would you sell for, and how much is
the buyer ready to payGilbert, at Ubiquisys, described how close interactions with his banker helped drive the price up among the bidders
assembled.Just like buyers, we meet bankers and lawyers too rarely at startup events, but there is much to learn with them
They make deals happen, avoid value erosion and optimize price
They often also make introductions before you engage them, to build goodwill and earn your business.And if you worry about fees, the right
banker handsomely pays for itself by finding more bidders and playing &bad cop& for you, avoiding direct confrontation with your future
Do you want a slice of the watermelon or the whole grapeFinal twist: Exits are not exitsWhen asked about what happens after an MA or IPO,
buyers said they generally hoped the founders would stay with them for many years
Often using re-vesting, earn-outs or shares of the acquiring company to incentivize them
Neville, from IBM, mentioned a security company they acquired whose founder is now the head of one of the largest IBM divisions.In the case
of IPOs, supposedly the ultimate &exit,& any block of shares sold by founders would face extreme scrutiny and might cause a price drop.So
who exiting during those deals Investors (and not always).Eventually, if the average age of a startup at exit is 8-10 years, the active duty
period of founders (if not replaced in the meantime) extends even more
Better love the problem you&re solving, and your customers!Thanks to speakers, participants and supporters of this Master Class
series:London:Frederic Rombaut (Seraphim Capital), Joe Tabberer (FirstBank), Chris Gilbert (Ubiquisys), Jonathan Keeling (Crowdcube), Fred
Destin, Tony Fish (AMF Ventures, James Clark (London Stock Exchange), Denise Law (SGCIB).Paris:Frederic Rombaut (Seraphim Capital), Manuel
Gruson (Dassault Systemes), Pierre-Henri Chappaz (Rothschild Global Advisory), Christine Lambert-Goue (All Invest), Olivier Younes (EXPEN),
Eric Carreel (Withings), Fabien Bardinet (Balyo), Xavier Lazarus (Elaia Partners), Pierre-Eric Leibovici(Daphni)
Jean de La Rochebrochard (Kima Ventures), Jeremy Sartre (SmartAngels), Gwen Regina Tan (Entrepreneur First).San Francisco:Natasha Ligai
(Logitech), Matt Cutler (Cisco),Will Hawthorne, (CODE Advisors), Ryan Rzepecki (JUMP Bikes), Charles Huang (Guitar Hero), Jeff Thomas
(Nasdaq), Shahin Farshchi (Lux Capital), Ammar Hanafi (Moment Ventures), Adam J
Epstein (Third Creek Advisors), Nathan Harding (EKSO Bionics), Kate Whitcomb, Anthony Marino and Ethan Haigh (SOSV).New York:Todd Neville
(IBM), George Patterson (HSBC), Ryan Rzepecki (JUMP Bikes), Aaron Kellner (SeedInvest), Jeremy Levine (Bessemer Venture Partners), Taylor
Greene (Collaborative Fund), Adam Rothenberg (BoxGroup), Eli Curi(Fenwick West), Ian Engstrand and Salil Gandhi (Goodwin), Warren
Spar(Sparring Partners Capital), Duncan Turner, Vivian Law and Sheng Ge (SOSV).
