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Insights from TechExit 2019

On April 10, 2019, Vancouver Startup Week attended 2019 at the Vancouver Convention Centre with over two hundred delegates. Throughout the conference, delegates learned how entrepreneurs can develop successful exit strategies and form connections with key investors, venture capitalists, and accelerators who can make it happen.

Key Points Every Startup Looking to Exit Must Know Over the course of the one day conference, there were three key points that nearly every roundtable discussion and panel emphasized the entrepreneurs must know to develop a successful exit strategy:

  1. Planning an exit strategy early is a competitive advantage when it comes to approaching key investors and buyers.

  2. Grow to scale and put in the time early to build relationships with potential acquirers so you have an existing network to draw from.

  3. Be prepared to execute the exit strategy with partnership agreements, metric reports and checklist ready to go. Reverse engineer from the end goal by bringing in the experts such as investment banks, lawyers and accountants familiar with venture capital and exits early.

Why 2019 is the Year to Plan Your Exit Strategy in Canada According to Cameron Burke, Managing Director of the Tech Sector for PricewaterhouseCoopers (PwC), it’s never been a better time for entrepreneurs to grow their companies and exit in Canada in 2019.
In 2018 and into the first quarter of 2019, annual Canadian venture capital funding levels have hit a record high with funding and deal counts up 35% and 30% from 2017 numbers, respectively. A total of $3.5 billion had been raised over 471 deals in 2018 alone for Canadian VC backed companies.
There are currently over 4500 government grant and incentive programs for startups to take advantage of when it comes to growth and funding. Investment from corporate sources in funding deals has also increased to 41% in Q4 of 2018, up from 39% in Q3. In fact, corporate investors have increased their participation in deals every quarter in 2018.

Due Diligence Checklist to Prepare for an Exit
To build a successful company with an exit strategy in mind, startups need to understand what their position is in the marketplace. How do they rank against the competition? How have they been able to attract and retain talent? Do they have an authentic brand and culture and does that culture enhance employees’ desire to help grow the business?
Having a communications strategy to connect with employees and being transparent with them on how the sale will work and how they will move forward is vital. Companies must also ensure that they have all employee agreements signed and be wary of any contracts with unclear terminations or with a change of control provisions that may jeopardize progress. Crucially, startups must also make sure that they understand the sales tax risk and have detailed and organized historical revenue reporting.

How to Build a Board that Will Support Your Goals
In addition to bringing in the experts early to plan a cohesive exit strategy, it’s important for a company to have a board of directors that supports company goals and have the experience, knowledge, and skills to help accelerate growth.
In the roundtable discussion on how to leverage a board of directors, moderated by Vancouver Economic Commission CEO, Catherine Warren, the emphasis was put on entrepreneurs to make their expectations clear to all board members from the outset of building the board. Build the board with a mix of strengths, knowledge, and experience and make sure to sell the exit strategy ahead of time to get all board members in consensus with the exit. Hannes Blum, former President and CEO of Abebooks, emphasized that boards must be diversified and having investors with smart money and a Rolodex of key contacts can only help to accelerate growth. For more on boards and exit strategies, please read our interview with Catherine Warren.

What Interested Buyers Look for in Startups They Want to Buy While building a board of directors to support an exit strategy, it’s important to keep in mind what prospective buyers may be looking for, when acquiring a new company.
Cultural fit and diversity among the teams are a key selling point for investors looking to expand their portfolios, with the geographical location also a consideration for US buyers looking to expand into Canada. Buyers are also concerned with a startup’s historical financial performance, market leadership, innovation, technology, key partnerships, efficiency, how their products and services fit with the buyer’s current portfolio and how the company has grown historically.
For startups, being as transparent as possible with historical metrics, efficiencies, growth, and technology can lead to a better sales outcome. To better prepare for an acquisition, these are some of the metrics startups need to grow their businesses with: qualitative feedback, customer engagement, website visits, leads and conversions, monthly and annual recurring revenue, average revenue/account, customer acquisition cost, customer lifetime value and net churn. The most important lever for a buyer is growth and all of a startup’s valuation metrics must support said growth.

Buyers are looking for the highest valuation, which means a startup’s growth rate plus their profit must add to up 40% (the Rule of 40). What this means is if a company’s growth rate is less than $5 million, they must have 50% revenue growth. If the growth rate is above $5 million, the revenue growth should be at 35%.
A buyer’s minimum request list from a startup will include the CIM or management presentation, quarterly financial statements for the last 8 quarters, quarterly financial forecast for the next 4 quarters, monthly recurring software revenue by a customer for the past 36 months and key cost items such as employee salaries and office lease obligations. However, each acquirer will have their own signature approach and startups must be ready to comply with additional reports.
Every prospective buyer has their own unique approach to determining the offer value they are prepared to make, but there are four key things every acquirer uses to calculate their offer price.

  • How much cash can the business generate?

  • Based on customer acquisition costs, how can growth be enhanced?

  • Based on the churn/retention track record, how much revenue is at risk?

  • Based on customer concentration, what additional risks need to be accounted for?

    Once an initial offer has been made, it is up to the startup to determine the blind spots in the acquirer’s value calculation, reveal key metrics that may have been missed, review assumptions for growth and reveal the unrealized value that will help them obtain the best offer possible.
    Post offer, startups need to work with prospective acquirers on what the longer term strategy will be. Clear, defined goals need to be made on what the next 100 days post-acquisition will look like, with the team and founders working on continued growth and the changes that need to be made.
    Looking for more information on exit strategies? Follow Vancouver Startup Week for more thought leadership pieces on exits, fundraising, and other startup business strategies.