Sports Betting Hall of Famer Sue Schneider is back with more monthly insights from the world of startups. This time she asks whether you have a plan for how to offramp your startup.
It’s never too early for a startup to be thinking about their exit. Yes, you focus on product development, building the client base/revenue, protecting your IP and building your team. But, looking at how to turn equity into cash in the long run is the ultimate goal for most founders.
In fact, there are some who say that adding exit planning from the very beginning of your business plan is beneficial in showing prospective investors that you have the long view. Even though a sale or merger will be down the road, offering thoughts on prospective acquirers in today’s environment helps to show that you know the market. Having conversations with investors upfront about their own exit strategies and how they envision an exit for your company will only help you align to make sure that you both are reading from the same map. This alignment needs to include founders, managers and investors. It will ultimately affect which product you offer, how you structure your cap table, and your organizational development.
Investors have their needs and you have yours. As you seek the synergies that are necessary for a successful startup, think about how you’ll put together an array of investors that make sense together and have similar goals and timelines to realize the expected liquidity that brought them together with you to begin with.
What some would call “excessive fundraising” to keep the doors open can lead to dilution for your initial investors. It also doesn’t inspire much confidence in your ability to bring the project to fruition. Attention to governance structures will help guide you as you grow but also should assist you in the long run as you seek an exit down the road. This will all help you as you prepare valuations, which is always a challenge for a startup.
Looking at how an exit fits in will be dynamic and ever-changing as the industry continues to evolve. You’ll set milestones and meet them (or not). You’ll pivot, likely a number of times, as you continue to build out your concept and see what the market really wants and is willing to pay for in the real world.
Having these discussions upfront and often helps build internal team buy- in and increases stability for the startup. The deck is stacked against startups anyway without having the upheavals and surprises that come from differing expectations.
On rare occasions, a startup concept in its initial stages of buildout will actually trigger very early offers of a purchase or merger. That triggers some decision making on whether the founder is just selling the existing assets or if they’re being asked to stay on and build it out with the additional resources or strategic partnerships offered by the buyer.
If you’ve received those inquiries, it’s important to take a look at and be very clear on expectations on both sides. If they want you to stay, in what timeframe are they expecting you to meet certain goals? Will there be non-competes involved after you’ve fulfilled your duties? What sorts of resources is the buyer willing to put in to build it out? Or are they buying your company to kill it as a prospective competitor (something which is not always evident at the beginning)?
Keeping your exit options top of mind in an annual review of your business plan is critical. Some use a 60-month window as a timeline goal as you work through building your staff, your IP, your database, customer list and other key assets. The whole concept of a secure virtual “data room” is key as you’re progressing and is the spot where investors or prospective buyers can find the documents they’ll require for due diligence. Make attempts to keep your financials in order from the outset since an audit will likely be in your future.
Maintaining contracts with everyone you pay (or buy from) is important as well as terminating those which do not work out. I learned that the hard way with dozens of contracts for a virtual trade show that was way ahead of its time and didn’t get built. An annual spring cleaning which entails formally terminating useless agreements can save you headaches when you’re in the throes of due diligence down the line. Keeping good track of the IP, trademarks and other assets which are owned by the company (not you personally) will also speed up the due diligence period.
There are clearly external pressures that affect exit planning. These include industry upsets, like the Unlawful Internet Gambling Enforcement Act (UIGEA) or Black Friday, which can be a deal-killer in a highly regulated industry like gaming. Legislative and/or regulatory challenges that don’t go in your favor can be deadly. We’re looking at conditions like that again today with sweepstakes and prediction markets. Once things get caught up in court, resolution can be years away. This is why the regular review of your business plan should include a detailed risk register detailing the possible minefields and how best to mitigate them.
Another big consideration in exit planning is company cultures. Yes, you may have identified two or three good prospective buyers early on in your planning process, but do you know how the fit will be between your company and the acquirer? This is particularly critical (and often hard to discern) if you and/or your key managers plan to make the transition and lock in for a contract for an extended period of time. It’s one thing to have money in the bank. It may be another way to have your stress and mental health affected by a bad cultural fit.
So, plan to explore exit possibilities from Day 1. Keep the conversations with key staff and investors to align goals and expectations. And be prepared to have your flexibility tested constantly on your startup journey.
