An exit is a very attractive vehicle, but like any vehicle, you first need to learn how to drive it, writes Beste Onay.
Founders are often told not to worry about their exit strategy and to just focus on growth. But what happens when they are faced with an exit event, such as an acquisition offer, and have little prior education on the topic? This is one of the most significant milestones as a founder and unfortunately for some, the outcome can end up very unfavourably due to a lack of education.
Australia is home to some of the world’s biggest unicorns and the innovation infrastructure we have in place is world class. Yet, despite the wealth of resources available for starting a company, there is a glaring gap in startup education when it comes to exit strategies. Nearly half of all exits happen by Series A and IPOs take years of preparation and many first-time founders are ill-equipped to make informed decisions.
Having supported over 400+ startups through the UNSW Founders program, and worked with some of Australia’s leading entrepreneurs, here are some of my top tips on how to navigate this complex but incredibly important stage of a business so founders can find optimal success in their exit strategies.
1) Start early
The one thing I am consistently told by founders who have been through an exit is that they wish they’d started sooner. Day-to-day startup activity can be all-consuming, but if you have your exit strategy in mind from the get-go, you’ll be much better prepared when the pivotal event comes.
This includes building strong industry relationships from day one. From partners to investors and even competitors – anyone who could potentially become an acquirer or merger partner within the foreseeable future. Exit conversations might take place years in advance, but building trust and having strong relationships will ultimately garner more interest and lead to better opportunities and deal terms.
Focus on learning the legal terms that will impact you most, from first rights of refusal to veto rights. This knowledge is invaluable and will prevent getting caught out later down the line. Whilst not the sexiest thing to consider when launching a start-up, knowing any potential implications of engaging with a strategic investor for example, understanding the small print on a contract, and questioning any clauses that don’t feel right to you will avoid big pitfalls when it comes to the exit stage.
2) Get your house (or garage) in order
So, you’re approaching your exit stage. What do you need to get prepped? Founders often underestimate the vast amount of due diligence, interrogation and auditing that comes with these processes. Governance may have slipped off the priority list in place of funding and R&D, but ensuring your data room has all the right contracts and IP agreements in place is non-negotiable. Engaging with a good lawyer early can help. The later the cleanup, the more costly and painful, and the last thing you want is for your company to be questioned mid-sale, this could lead to the buyer dropping the price or pulling out altogether.
Having the right advisor in place is also crucial. This will all be based on the size of your business, the sector you operate in and the type of exit event, but they should be both experienced and trusted, someone who can aid in strategy, kickstarting the right conversations, negotiating terms, organising and attending roadshows (IPOs) and ultimately helping you to achieve your exit goals. It is, however, equally important to know when you’ve outgrown your advisor. Always question motives and if something doesn’t feel right give yourself time to consider the implications before you make agreements.
3) Understand what is valued
Speaking of motives, ensure you thoroughly understand the decisions behind the prospective buyer or partner. Are you a rare asset to them? Do they want to expand their market share? Is it a mixture of both? There is a whole list of motivations. Having this knowledge will ensure you can negotiate the best possible deal.
Starting early and having your house in order are great steps to ensuring a clearly defined value. It also gives you the proof and opportunity to aid in building competitive tension when looking for the right deal, giving you the power to make an informed decision and avoid underselling yourself. Sometimes competition is the only way for a founder to increase the price.
A big part of this is understanding the types of companies that are more successful in raising capital and being bought. Paying attention to valuations, IPOs, M&A and market trends builds your knowledge and helps you to see the patterns. For example, we’re consistently hearing that investors are interested in profitability over high growth — very different to a few years ago. If you approach your business or even an investor or partner with the wrong insight, you risk losing their interest and potentially harming your outcome.
Finally, an IPO isn’t really an exit for a founder at all. Shareholders and acquirers value a founder who is committed and going to stick around in the business. Think about what is most valuable to you and how long you want to stay in the business before making any big decisions.
Australia’s startup ecosystem is maturing
As more founders look towards the end of their startup lifecycle, the industry must do a better job at providing founders with the tools, tactics and techniques to complete a successful exit strategy. This makes the ecosystem fairer for everyone.
Whilst there is limited education on the topic, it isn’t impossible to find. From mentorship to self-education, there are many options — UNSW Founders, for example, runs an ‘Exits for Entrepreneurs’ program, designed to bring industry expertise and learnings into one place.
Get your lessons in now so when you’re ready to tap into the exit vehicle you’re fully proficient and there aren’t any nasty bumps in the road.
Beste Onay is an Investments and Portfolio Manager with UNSW Founders.
