When do we consider the exit strategy

I will admit to having a bias towards exits and focus my review of a potential investment on the exit potential but I do sometimes get impatient when the investment proposal has little or no information on the exit path. Even where an exit path is nominated, the proposals demonstrate either limited information about what it will take to structure the exit or look like a last minute addition to the plan to ensure that that box is ticked.

Without exception, the normal business plan is built on a revenue and growth model where the substantive part of the plan deals with how the venture will develop market traction, acquire and support a growing customer base, develop strategic partnerships and so on. However, such a model drives you either towards an IPO, a very high hurdle indeed which very few will make, or a financial exit (an EBIT multiple) which has relatively high risk, long timescales and, on average, a low ROI.

High growth potential is the key

What I look for is high growth potential which will support a strategic value exit. These only occur in a small percentage of ventures but they stand out because they have a unique set of attributes. They have a product or service which satisfies a high compelling need, focus on very well identified and reachable but large niche market, demonstrate good scalability and have a strong competitive advantage when fully deployed by a large corporation. However, when I see the strategic exit possibility, it is rare that the entrepreneur or their business advisors have even considered the possibility.

Our business community has limited knowledge of strategic exits and very few know how to construct a robust strategic exit strategy. What this means is that while you see the possibility, you are confronted with a lengthy conventional growth business plan which usually requires a significant investment to develop it into a solid business suitable for a financial exit. While the conventional plan may be interesting, the strategic exit path will normally generate a significantly higher ROI, has considerably shorter investment timescales and usually a much reduced investment requirement.

You need to build strategic value

Now comes the hard part – how do you shift the focus of the entrepreneur the highly detailed plan for growing their baby to constructing an entirely different plan where the strategic exit may occur in months but usually less than 2 years. The focus will switch from building out the business to building strategic value. If the buyer has the distribution channel, organization and funds to fully exploit the strategic asset or capability, they may not need your sales force, customers, distribution channel or management. Your resources will focus instead on creating additional IP and scalability, making contact with potential buyers and building the deal team.

In my experience few angels have been down this path because few have experience of putting together a strategic exit as part of the investment evaluation. The ones who have this experience have mixed opinions on how to move the entrepreneur from a financial exit to a strategic exit. Some prefer to allow the entrepreneur to present their business proposition and then, through discussion, shift their focus to a strategic exit. Others prefer to have the entrepreneur understand and evaluate the possibility of a strategic exit before the first presentation.

Consider the exit before you seek investment

My preference is to allow the entrepreneur to consider the possibility before the first presentation so they are more open to a major change in direction. I achieve this by sending then to the ebook ‘Raising Angel & Venture Capital Finance’ (www.drexit.net)

I ask them to read the book and revise their proposition in light of the exit possibilities. Since the ebook covers both financial and strategic exits, this gives them the opportunity to consider both exit paths. It has the additional advantage of showing them that the investment decision will depend on the exit strategy. Those who then take the strategic exit path are much more open to major shift in focus. The higher exit values in strategic exits also makes the discussion of valuation easier as there is potentially much more harvest money to spread around.

What we do know is that the focus on exit informs the business development strategy. If we work back from the exit, we can establish a very specific set of actions and milestones to be achieved to correctly position the business for the identified buyers. Funding can then be directed towards specific activities to ensure investment funds are only used for exit critical expenditures.

Angels have specific criteria they match

An informed entrepreneur who understands the nature of angel investment and the critical part which the exit plays in the process is much easier to work with. With strategic exits this is critical to ensure that entrepreneurs and the investors are aligned on strategy, the use of the funds and timescales.

An angel interested in understanding more about strategic value investment and strategic exits should read the ebook ‘Invest to Exit’ also available free from www.drexit.net