An investor on common startup exit dilemmas

Investing is easy in the start up world. The difficulty lies in managing growth and continuously fine tuning your strategies to adapt to an ever changing world. The most difficult part yet? To exit.

Provided you find a buyer, the sheer difficulty of getting all stakeholders on a common platform to agree to a sale is extremely challenging.

Preparing for a successful exit requires an acknowledgement that you have run your course as an independent entity, and the obstacles currently being faced by the business, though not insurmountable, have the potential of distracting valuable time, effort and energy from the core task of generating growth.

Photo credit: Jason Trbovich

Obstacles for a successful exit

These obstacles can manifest themselves in a myriad of forms. The business may be running short on cash, high on receivables, and receivables may not be turning into cash as envisioned. Other challenges include discord amongst key personnel, not being able to attract suitable talent to join and stay with the company or raise new cash to sustain the business at the desired valuation. Or it might just be the sheer irrelevance of the business model itself.

Faced with such challenges, it becomes critical for the company to embark on midcourse corrections in strategy and identify gaps in the business model of potential buyers. It may sound logical, but in real life, it requires mature minds to acknowledge the truth and decide whether to throw in the towel on their own entrepreneurial dreams to accomplish such sales.

Looking back at our two exits in 2015, I find reflections of the above factors in various combinations at play in both the cases. An entrepreneur struggles to create a viable business and the challenges which he has to bear on his shoulders can be daunting, to put it very mildly.

 To quit midway is to leave a lot of potential moolah on the table, and this is a very hard call to make.

The fact that you are being bought implies value in the model being pursued with the accompanying allure of significant riches down the road if you were to endure the hardships and eventually prevail. To quit midway is to leave a lot of potential moolah on the table, and this is a very hard call to make.

For the buyer, it usually means the acquisition plugs in a gap in the product portfolio, widens the core offering, saves time to market and brings in an additional client portfolio along with marketing and technical talent, which can strengthen its own positioning in a competitive arena. Of course, the buyer will want to get away paying a minimum sum while the seller wants to optimise what is on offer.

The interesting part here is the economics of absorption of the selling team into the buyers team. Positioning of the incoming team, their compensation and incentives and alignment with the objectives of the existing team are critical for any successful transition on to the new company, and is often what determines the success or failure of any acquisition.

But it is critical that there exists enough participants in the system to constitute a critical mass of buyers and sellers. A large enough pool of players in the same pond ensures brutal competition amongst the participants to bring out the optimal business model in play. Eventually, capital flows towards the potential winners and others are absorbed into the stronger players or fall by the wayside to create a sustainable business.

There are a few interesting markets which come to my mind where a start up ecosystem has emerged and surprisingly enough, in very different conditions.

Early stage investing hotspots

USA