Why & What? | Exit Planning for a VC Backed Company
This will be the first in a series of posts exploring M&A for VC backed companies by Nicole Bentz, Flyover Capital & Abhinaya Konduru, M25.
For many early-stage founders, an eventual exit seems far, far down the road. While it may be true that an eventual exit maybe years ahead of you, anyone who has been a part of a successful exit will tell you that the groundwork for it was laid long beforehand.
That is why we believe planning for your exit early on in the life of your company is extremely important. This post will explore why exit planning matters, what potential exit paths lie ahead of you, who acquires, and why companies actually acquire businesses.
Why Exit Planning Matters?
Exit planning requires that you develop a clear vision for what a successful exit will look like. Perhaps more importantly, it forces you to identify the steps necessary to place yourself on a path towards that successful exit.
Examples of those steps may include developing a set of new features to your product or capturing an adjacent segment of the market. Often, one of the most important steps will include developing and nurturing strategic relationships with incumbents and potential acquirers. These strategic relationships will prove invaluable to you in planning for an eventual exit for a number of reasons:
First, by developing relationships early-on with a number of potential strategic acquirers you increase your chances of holding a competitive M&A process. It is always in your favor to have a competitive M&A process with multiple potential buyers at the table. You are more likely to derive a higher value and better terms for your company at exit if there are a number of competing buyers vying for your company.
Secondly, by meeting with strategic acquirers early-on you can use those conversations to learn their business, the challenges they are facing, and where you can provide value without the pressure of an impending exit. With that knowledge in mind, you can determine how best to position your company for a specific buyer.
Lastly, as you meet with potential strategic acquirers you will learn which acquirers are not a fit for you and your company. Remember, M&A is often also an interview process. You and key members of your company will likely be asked to join the acquiring company for an agreed-upon period of time. Use these early conversations to do your own diligence on a potential acquirer. How would your team fit in their culture? How has this company integrated previously acquired companies? Where could I add value within the company post-acquisition? Learning the answers to these questions quickly, and early on, will save you time and countless headaches down the road.
Finally, exiting your company is hard! It is a fragile process that can easily fall apart at any point. It takes an unbelievable amount of time, coordination, and intense focus. If you have not done the work to prepare for it early on, you will only make the process harder on yourself.
What are My Potential Exit Paths?
There are two potential exit paths for venture-backed businesses:
- Going public (either through an IPO, direct listing, or even a SPAC)
- Through an acquisition
For simplicity’s sake, we will focus on the higher probability of these two options: an acquisition.
Generally, successful acquisitions occur when a company is bought, not sold. Acquirers will seek to buy companies that have built a strong business. Therefore, the best way to reach a successful exit is to focus on building a valuable business! Doing so will give you more leverage and optionality when entering a negotiation with a potential acquirer.
Companies that are sold, not bought, enter an M&A process under pressure, in a time-crunch, and with little negotiation power. Remember, companies that need to sell act very differently from companies that are open to being purchased. Make sure your interactions with potential buyers reflect the latter!
In the next post, I will go into detail about who the acquirers are and why they acquire companies.
