In his recent blog post, Scott Munro of VC firm iNovia Capital discusses exit preparedness for start-ups, and why it matters.
“While some companies are aimed at an ultimate IPO, the fact remains that less than 1% of start-ups grow into becoming public companies,” Munro writes. “The other 99% need to consider other ways to return value to the people and organizations who invested money into the company.”
The key here is developing strategic business partnerships. “Over the years, I received numerous calls from CEOs or investors who told me that Google should buy their company. When I asked them who they were working with at Google a blank stare came across their face – they had never had contact with Google, nor with any other potential acquirer,” he notes.
For most large companies who a potential acquirers, “they will not engage in an acquisition discussion without having an internal business leader sponsor,” he adds.
Making these kinds of connections takes effort and time — often more than six months, according to Munro — so do it well in advance of seeking a buyer. Partnerships aren’t only good for exits; they also can help your company move into growth fundraising and provide start-ups with more negotiating leverage by having more than one acquisition possibility.
“Bear in mind that in the case of almost all large exits, the company being acquired was not for sale. The transaction was initiated by a preliminary relationship that developed over time in which ultimately the buyer determined that the target was strategic enough that it shifted from a partnership relationship to an interest in acquisition. When this trigger event occurs, it is optimal that other partnerships exist that can be leveraged to create a competitive M&A environment,” Munro points out.
Developing relationships with potential acquirers should be a goal of every start-up. “This way,” Munro says, “the chance of the very desirable situation of a competitive bidding war for the target company is made more likely, leading to greatly increased exit valuation.”
Source: iNovia Capital