It's the startup CEO's job to make the inevitable exit a smooth one.
Most startups fit into a predictable framework when it comes to planning an exit strategy. Emerging companies receive funding from an outside investor at some point. This means that an exit or liquidity event is expected in the not too distant future. Traditional venture capital funds have a lifespan of 10 years. Hence, as the fund reaches maturity, the pressure will mount on the startup CEO to find an exit for the company.
However, a startup should not have an exit strategy as a priority. The priority instead is to run the business effectively with the goal of being successful and serving customers. That's not to say that the CEO should not be preparing for a successful exit. On the contrary, reacting quickly and decisively to an acquisition offer is important.
Part of the preparation is understanding, expanding, and maintaining the company's ecosystem of partners, competitors, customers, and employees. This involves building visibility and awareness within the ecosystem. Keep in mind that partners, competitors, and customers are also potential acquirers of the company.
An important job for the CEO and his or her management team is to inform partners about the company's progress, educate them about the value of the joint product solution, and build personal relationships with their management. An important benefit of maintaining a dialogue with other CEOs is gaining invaluable information about company strategies. That groundwork could pay off handsomely if a potential acquirer shows interest. The startup management team needs to react to an offer.
A term sheet might be presented that leaves little time to get counteroffers. It is critical to be able to pick up the phone, contact CEOs of other potential acquirers, and immediately engage in a meaningful dialogue. At this stage, there is not enough time to make introductions and educate the other side about new technologies.
Another element of the preparation for a successful exit strategy is knowing the market segment and the various exit strategies and scenarios that work in that segment. In the technology sector, acquisitions are the most popular strategy. The savvy CEO will keep his or her ear to the ground and have a fairly accurate idea of the M&A dynamics in the sector. This means prices and multiples paid, but also who is looking to grow through acquisitions, in what market segments, the urgency, and negotiating tactics.
An often-overlooked part of the M&A preparation is the readiness on the accounting and legal side. Due diligence is part of all acquisitions, and a deal will be scheduled to close anywhere from 30 to 90 days once a term sheet has been signed. I emphasize to all startup CEOs I advise the importance of making sure the accounting is compliant; contracts with customers, partners, and consultants are in place and properly formalized; patents are properly filed; and board meeting minutes are neatly maintained, available, and signed by all directors.
The relevance of this recommendation is that the due diligence window is a busy period, so the target company needs to be able to respond efficiently. If the diligence cannot be completed during the time window prescribed by the term sheet, it leaves a possible out for either party, and there is a danger that the acquisition will not be finalized. This is damaging to the target company. Other potential acquirers could assume that the merger failed because the due diligence uncovered negative elements, making the startup less attractive to other potential acquirers.
A key strategic question for the startup is the decision of whether to hire a banker to help in the process of selling the company. Often, the outcome hinges on the CEO's M&A experience. A benefit to having a banker represent the company is that it sends out an unequivocal message that the company is for sale. It also relieves company executives of a good deal of work, enabling them to focus on their core business at a time when the penalty for poor execution could be millions in the acquisition price.
Finally, a few words on the merging of private companies: Combining select startups looks like a great strategy on paper. It creates a larger company with a broader product offering that can more effectively compete with the larger suppliers. But it's not easy, and it can be rife with problems. Figuring out each company's valuation is the hardest, though straightening out who's going to lead the combined companies could be harder still. Most semiconductor and EDA companies have determined this is not the preferred approach. As a result, "build-ups" of small companies is a rare occurrence.
That brings us back to big company acquisitions as a way of life in our industry. The ecosystem supports and fosters it, which is why a startup CEO has an obligation to stay connected, if not for now, then certainly for the future.
— Michel Courtoy is a former design engineer and EDA executive who sits on the board of directors at Breker Verification Systems.