Exit Strategy - Nice to Have or Need to Have?
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Exit Strategy Nice to have or need to have? Author: Eva Hukshorn
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1. EFactor is a Smart Network that matches entrepreneurs with the very people who can help them grow
2. Finding Business Partners: from partners to investors, from coaches to customers
3. Largest Entrepreneurial Network in the World with 1mio members in 185 countries
4. An online community Offering you a network, knowledge, events, and every business resources you need to succeed @ discount!
5. GO Online, fix your personal profile & company profile and get MATCHED!
It’s not about connecPons -‐ it’s about the right ones…
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Eva Hukshorn: An introducHon
• Work Experience - Current: Partner EFactor
Board of Advisory: TreFoil Energy / CleanDrinks / Global Thinkers / ShowLinq
Coach Startup: Bootcamp Amsterdam / New Venture McKinsey - 2009 – 2010: Dutch BouHque – Marktlink Mergers & AcquisiHons, Amsterdam - 2007 – 2009: Royal Bank of Scotland – Corporate Finance, Amsterdam - 2004 – 2009: ABN AMRO – Corporate Finance New York, Amsterdam - 2003 – 2004: Accenture – ConsulHng London, Amsterdam
• EducaPon - 1997 – 2002: MSc Economics, Finance – University of Groningen, the Netherlands - 2003: InternaHonal & Asian Studies – NaHonal Sun Yat-‐Sen University, Taiwan - 2009 – 2011: CerHfied Management AccounHng (CMA) – InsHtute of Management Accountants
(IMA), United States - 2009 – 2011: Colloquium General & Modern Art – Academy for History of Art, the Netherlands - 2012: InternaHonal Financial Report Standards (DipIFR) – AssociaHon of Chartered CerHfied
Accountants (ACCA), United Kingdom
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Webinar Program Overview 2012
June 19: Business Plan WriHng -‐ A Roadmap to Success July 3: Pitching & PresentaHon -‐ 3 Minutes, 1 Impression July 17: Strategy -‐ A Vision for the Future, A Strategy for Geing There July 31: BudgeHng & ForecasHng -‐ PredicHng the Outcome Aug 14: Working Capital -‐ An Unknown Key to Success Aug. 28: Capital Management -‐ Playing with Risk Sept 11.: Funding & Investments -‐ Some Sources are More Equal then Others Sept. 25: ValuaHon -‐ Art or Science Oct 9: Exit Strategy -‐ Nice to Have or Need to Have? Oct. 23: Bootstrapping -‐ An AlternaHve Answer to Funding Nov 6: Crowdfunding -‐ The Power of Friends, Family and Fools Nov. 20: Networking -‐ Nice You have 3000 Friends, I have 30 Relevant ConnecHons Dec. 4: MarkeHng & (Social) Media -‐ Noise or Value? Dec. 11: No Sales, No Glory Dec. 18: Most Common Mistakes of Entrepreneurs 5
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Exit strategy: Nice to have or need to have?
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2012 2013 2014 2015 2016
Business Plan
Product development
Prod. A
Beta test
Product development
Going to market US
Alpha Customers
Get work space
Product development
Prod. B
Beta test
Going to market
Expand in EU + India
Break-even
Promotion campaign
Employees 3 5 8 10 12 15 20 25
Promotion campaign
Capital need: USD 150k 2nd round: USD 1mio 3rd round: USD 3mio
M M E
Revenue / margin 200k / 10% 1mio / 17.3% 4mio / 21% 12mio / 28%
EXIT USD 25mio
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1 PreparaHon is key 2 Increase chances of success
3 Company purpose shortens
exit Hme
4 PreparaHon increase exit
valuaHon 50%
A successful exit strategy is like project management: preparaPon leads to increased success on all fronts
5 Increased chances of funding
6 Align investors
7 Sales pitch
8 Keep it simple
It is just another project management track
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The importance of a company culture for success
SUCCESS
FAILURE
Founders Culture + Investors
culture
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Average life cycle of a startup
REVENUES
PROFIT
No revenues OperaHng losses
Small revenue Increasing losses
Growing revenues 1st signs of profit
Idea: Pre-‐Seed Building: Seed Growth: Early & Later Stage
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ASSSITANCE TO GROW
PRODUCT DEVELOPMENT
+ SALES
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VALUE
TIME
Idea: Pre-‐Seed Building: Seed Growth: Early & Later Stage
Value creaHon in a startup life
START COMPANY
INVESTORS ON BOARD
ASSSITANCE TO GROW
INVESTORS ON BOARD
EXIT PREPARATION
EXIT
STARTING UP: 10% value
EXECUTION: 50%
EXIT PREPARATION: 40%
VALUE
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Increased exits of smaller companies
1. Mark Zuckerberg is an excepHon 2. Trend of smaller exits 3. No private company data 4. 5.000 US tech companies sold per year for an average of USD 15mio 5. Value from USD 0 to USD 20mio is the hardest 6. Opportunity for experienced founders & investors
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The influence of Venture Capitalists and Angel Investors on exits
Source: Basil Peters
EXIT MULTIPLES
EFFECT
ON SUCC
ESS CO
MPA
NY
20%
10%
0%
-‐10%
-‐20%
LOSS
1-5X
5-10X
MORE FAILURES
FEWER 1-5X EXITS
MORE 5-10X EXITS
SLIGHT INCREASE IN HIGHER EXIT MULTPILE EXITS
10-30X >30X
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Your exit Hmeline will expire…
Source: Basil Peters RE
TURN
ON IN
VESTMEN
T (ROI)
5x
3x
2x
1x
0x
YEARS FROM INVESTMENT
4x
6x
0 1 2 3 4 5 6 9
Perfect Exit Window Decreasing ROI often
due to lack of preparation and hubris
Venture Capitalist delay exits when ROI are not met
10 7 8
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How Venture Capitalist can block exits
Research: • Extend exit with c. 10 years Contract items to watch: • Preferred shares to veto sale • Board posiHons • CondiHons to exit
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ValuaHon: Comparable Analysis: a relaHve valuaHon method
Comparing your company with other companies, transacPons or relevant items based on comparable rates to determine your (implicit) value EXAMPLES OF MULTIPES: • EBIT mulPple = Company Value* DIVIDED BY EBIT
– how much Company Value is US$ 1 of EBIT worth
• Equity value per member = Total Equity Value DIVIDED BY Total members – How much Equity Value is 1 member worth
• Equity value per Eye Ball = Total Equity Value DIVIDED BY Total website visitors – How much Equity Value is 1 visitor worth
Note: Company Value = Equity Value + Long Term LiabiliDes -‐ Cash
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ValuaHon: Comparable Analysis: problems for startups
• What do you scale value to?
• Who are your comparable companies?
• How do you take survival or other risks into account?
Ø 20% small company discount Ø Note: much more different kinds of mulDples exist: P/E, EBIT/Sales, Equity Value/Sales etc.
Startup
Earnings(before(Interest(&(Taxes $10
Total(Members 10,000
Visitors(Website(p/m 30,000
Industry,Average,Multiples
EBIT(Mutiple((Company(Value(/(EBIT) 5.3x
Equity(Value(/(Member 98.0x
Equity(Value(/(Eye(Ball 54.0x
Implied,Value,Startup
Company(Value $53
Equity(Value $980,000
Equity(Value $1,620,000
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ValuaHon: Venture Capital Approach: Formula & AssumpHons
Post-‐Money ValuaPon = Terminal Value or ValuaHon at Exit
DIVIDED BY Return on Investment (ROI)
SIMPLE VERSION -‐ ASSUMPTIONS: • No share issuance ater first round • % of ownership remains constant unHl exit
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ValuaHon: Venture Capital Approach: Terminal Value
DeterminaPon Terminal Value: 1. Revenue in exit year 2. Industry standard profit as % of revenue 3. Expected Net Profit 4. Comparable Price per Share / Profit = P/E raHo
EXAMPLE:
Startup
Revenue&at&Exit $&45mio
Industry&profit&margin 20%
Industry&Equity&Value&/&Profit&(=P/E&ratio) 8x
Expected&profit&at&Exit $&9.0mio
TERMINAL/VALUE $/72mio
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Venture Capital Approach: Return on Investment (ROI)
ROICash(Invested(
MultiplePre5Seed(Capital 75%+ 20x
Seed(Capital 60% 10x
Early(Stage(Capital 50% 8x
2nd(Stage(Capital 40% 6x
3rd(Stage 30% 4x
Bridge 20% 2x
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Venture Capital Approach: Pre-‐Money ValuaHon for Seed Capital Startup
Post-‐Money ValuaPon = Terminal Value or ValuaHon at Exit
DIVIDED BY Return on Investment (ROI)
Post-‐Money ValuaPon = US$ 72mio / 10x = US$ 7.2mio
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ValuaHon: Discount Cash Flow
• Sum of all present value of future discounted cash flows + terminal value • Terminal Value:
Free cash flow 2012 2013F 2014F 2015F 2016F
FCF 9,324 10,855 11,472 11,900 12,302
Cost of capital (WACC) 0.0 9.1% 9.1% 9.1% 9.1%
Discount factor 0.917 0.841 0.771 0.707
PV of FCF 9,953 9,644 9,172 8,694
gWACCFCF
−T
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1 RaHonal assistance in emoHonal Hmes
2 33% of M&A transacHons fail
3 Increased failure rates with no (strong) advisors
4 General process management
Select M&A advisors on the Click you have with them
5 Playing chess
6 ReputaHon
7 Local
8 Expensive but worth it
Don’t do an exit by yourself, get advisors on board!
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The Exit Coach
Exit coach versus M&A advisor 1. Determining exit strategy in the very beginning 2. Early involvement compared to M&A Advisors 3. Exit with the coach and without an advisor Role Exit Coach: • ValuaHon • Chances of success • Exit strategy planning • IdenHficaHon of milestones needed to be reach before sale • SelecHon M&A advisor
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Maximize value through mulHple bidders
Safety: • 33% of the transacHons fail Predictability: • The sale is definitely going to happen one way or another NegoPaPon strength: • Bewer deal terms Maximize value: • Increased awracHveness EffecPve governance: • Picking the best deal
Companies are sold, not bought.
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Strategic value to increase exit value
Reason to buy: 1. Increase value of company being acquired 2. Acquired company increases value of buyer 1 + 1 = 3: • Take out compeHHon • Understanding synergy for buyer • Making sure the buyer understands your business potenHal
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Built to flip
What is it? • Serial entrepreneurial mindset • Building fundaments to sell Built to flip AND last:
– Solid team – OrganizaHonal structure – Healthy culture – Winners
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Conclusion & final remarks
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BUILT TO FLIP AND LAST!
Unlock STRATEGIC VALUE
MULTIPLE bidders
Use an ADVISOR
Keep EMOTIONS OUT of valuaHon
Start AS SOON AS POSSIBLE
PREPARATION is key
Exit Strategy is NECCESARY
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Webinar Program Overview 2012
June 19: Business Plan WriHng -‐ A Roadmap to Success July 3: Pitching & PresentaHon -‐ 3 Minutes, 1 Impression July 17: Strategy -‐ A Vision for the Future, A Strategy for Geing There July 31: BudgeHng & ForecasHng -‐ PredicHng the Outcome Aug 14: Working Capital -‐ An Unknown Key to Success Aug. 28: Capital Management -‐ Playing with Risk Sept 11.: Funding & Investments -‐ Some Sources are More Equal then Others Sept. 25: ValuaHon -‐ Art or Science Oct 9: Exit Strategy -‐ Nice to Have or Need to Have? Oct. 23: Bootstrapping -‐ An AlternaPve Answer to Funding Nov 6: Crowdfunding -‐ The Power of Friends, Family and Fools Nov. 20: Networking -‐ Nice You have 3000 Friends, I have 30 Relevant ConnecHons Dec. 4: MarkeHng & (Social) Media -‐ Noise or Value? Dec. 11: No Sales, No Glory Dec. 18: Most Common Mistakes of Entrepreneurs 28
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Thank you!
This document was prepared by Eva Hukshorn. Several people and organizaPons have inspired
her to write this presentaPon, amongst which are, but not limited to the Founders of EFactor,
ABN AMRO/RBS, University of Groningen, InsPtute for Management Accountants