Eight Lessons Learned in Eight Exits
In the last couple of years, we have been fortunate to successfully exit a number of good startup companies; the recent one being LightCyber, which was sold to Palo Alto Networks a few weeks ago. This is a great opportunity to share my lessons from eight exits. Three as an entrepreneur, and five as an early stage investor.
Lesson 1: Exits Are Good (!)
Writing this down, it seems like a complete no-brainer. It should be, but this is not always the case. I often hear people speak negatively about exits, but I completely disagree with them. Exits that provide investors a good return for their money and provide entrepreneurs with a great financial outcome for years of effort are not only good, they are essential. Investors need to make good returns; otherwise, they will simply stop investing. Entrepreneurs need a good outcome from their hard labor, otherwise they will stop making magic. Exits are the fuel that the innovation industry is based on. Without this fuel, innovation will flounder.
Lesson 2: Companies Are Not Being Sold, They Are Being Acquired
I have to apologize for using a cliché (not a big fan of clichés..) but sometimes, clichés are actually correct. Exits are important, but you cannot build a company with only an exit in mind. You need to build a real company, with real clients, real products, etc. Our experience is that when you build good companies, acquisition proposals will come to you (actually, for every company we have invested in and is 18 months old or more, we have received proposals for). On the other hand, if a company is misbuilt, even the best sales person will not be able to sell it.
Lesson 3: Exit Strategy, From Day 1
I believe that every company should have an exit strategy from day 1. As with any strategic plan, it may change in the future. Nevertheless, a plan should be there. In Glilot, we like to see two exit alternatives: the main one – a big play for a big independent company (the IPO route), and a fallback plan for an M&A deal. As you will see in the following lessons, the exit plan determines many important decisions in a company life – picking the right partners, raising the right amount of funds, etc.
Lesson 4: Find the Right Partners
Different partners have different strategies and different desired outcomes. A VC, for example, will typically shoot only for a big outcome in the shape of a significant IPO or a big M&A. If, realistically, your company’s exit strategy should be more modest, it is simply not relevant for these type of players. Getting them on board means not just that they will be unhappy (a very bad thing to start with – in a successful company, all partners need to be satisfied), it means that your chances of reaching a successful outcome, even a modest one, have been reduced to shreds.
Lesson 5: Raise the Right Amount, in the Right Terms
This is a hard one… Most CEOs will vote to raise the biggest amount possible in the highest valuation possible. This is the natural thing to do, though not necessarily the smartest thing to do, and definitely not always the best way to optimize your chances of creating a successful exit. Here is how you should think about it: For any $1 you raise, you should return at least $4 to your investors (start up investors shoot for 10x, but in many cases will be happy with 4x as well). Therefore, if you raise $30M on a post valuation of $100M, the minimum exit that makes sense is around $500M. If you are not certain about your ability to reach this goal, rethink the round.
In one of my favorite episodes of Silicon Valley, the founder’s advisor, Monica, urged him to demand a lower valuation. As ridiculous as it may sound, it is actually a smart move.
Lesson 6: Timing is Everything
Life on a start up is a roller coaster; the environment – both internally as well as externally – keeps changing. A company can be worth $1B today and 10% of that tomorrow, or vice versa. What does it mean? It means that any proposal you get today may be irrelevant next year. I am afraid I have no specific recommendation here, other than to remind you to be aware of the importance of timing, and to not take anything for granted.
Lesson 7: Sales Tactics
What should one do when it comes down to an M&A? What is the best way to drive up the price and to increase the odds of closing a deal? Unfortunately, there is no clear answer here. Looking back, in a vast majority of the deals I have been involved in, the relationship between the acquirer and the company had been around for a long time. It was not the case of an introduction made by a banker (or another entity) prior to the transaction. This makes a lot of sense in fast growing technology fields where the potential players are limited; to provide real value, an intimate relationship must be created way before the transaction. I did learn, though, that creating a competitive situation is very important to drive the best value of an M&A transaction.
Lesson 8: Be Patient
Most importantly, be patient. Building companies for success takes time. It is a marathon, not a sprint. In addition, every good company I know had many obstacles along the way. Even if you hit a big wall, keep your eyes on the ball, and focus on building great products that your customers truly need. Build real relationships with leading players in the industry. If you do that, and you are patient, you will reach your final goals.
A few days have passed since I have drafted this post. During this (short) period, it was announced that Intel is buying MobileEye for a whopping $15 billion – a great outcome for the founders and investors. These are great days to be an innovator, and there is great pride in doing it from here, Israel. Big applause to the MobileEye team.
To the rest of you – best of luck, enjoy the ride!