You never want to have to sell your company … but you always want to be bought! Always remember that you have two products: what you design, build, and sell -- and the company itself. In this workshop, we'll look at how an “exit strategy” is an essential part of any solid business plan. Bottom line: you want to create a company that is an irresistible target for buyers – yes, you do!

1. Build 2B Bought
Randy Smerik
Founder/CEO, Osunatech, Inc.
randy@osunatech.com
July 11, 2013
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International
Startup Festival

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Fundamental Premise:
Having a Business Focus your
Exit Strategy is Healthy and
Good for You
Let me show you why …

3. Context: 4 Business Outcomes
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Failure
Company shuts down or asset sale
where there is a loss for all involved
Lifestyle
Business reaches critical mass and
profitability and provides an income for
its exec team and employees
M&A
Business is bought and incorporated
into a larger entity at some profit to
investors
IPO Initial Public Offering
Our focus
is here

4. IPO versus M&A Venture Exits
VC backed liquidity events
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Since 2000,
median is 90% of
exits are M&A

5. IPO versus M&A Exits – Part 2
VC backed liquidity events
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2009 – 3.1%
2010 – 14.7%
2011– 10.8%
Trend
continues in
2009-2011

6. M&A Transaction Volume by Deal Size
Private Targets - Internet, Communications & IT
Infrastructure Software & Services M&A – Q1’2011
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source: SagePoint Advisors
Average M&A
transaction is
$12M and
median is $10M

7. Let’s see what Google Says
• We care about Google because in the last 2 years
Google has been the most active M&A buyer with
over 65 transactions
– Next on the list would be EMC (25), AOL (24), and
Cisco (19)
• Charles Rim (former top Google M&A guy) stated:
– “90% plus of our transactions are small transactions.
Less than 20 people, less than $20M and that is truly
the sweet spot”
– “We do prefer companies that are pre-revenue”
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8. Reality versus Hopes & Dreams
• The reality is that if you have a successful outcome to your
business it will likely be an M&A event worth approximately
$20M
• Logic would suggest that you should at least factor that into
your business planning
• But, we are typically encouraged to “swing for the fence”
and “never say die”
• Why? One big reason is because traditional funding
options require that mentality to support their business
model
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Getting funded …
… with your Eyes Wide Open!

10. Enter: Crowdsourcing & Social Networks$$$
Desire for Control/Information
Friends &
Family
Angels
Seed &
Incubator
Convertible
Debt
Super
Angels
Traditional
VC’s
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Social Graph
and Viral
Note: there is lots of overlap
between these categories in the
real world

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Let’s look closely at traditional VC’s …
Why? Because traditional VC’s tend
to exert the most control in the form
of Protective Provisions and due to
the inherent nature of their business
model
- and, this can affect your exit!

12. Trends in the VC World
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13. Issue: VC’s need some 10x Returns
• Why?
– Limited Partners in a VC fund expect ~20% return per
year
– Typically, returns come from 20% of the investments,
i.e. out of 10 companies funded 2 will provide returns
– Due to the length of time the money is typically tied
up in companies and how long the funds are for, the
capital only gets to be invested once
– When you do the math, the average return of those
two winning companies needs to be over 10x (actually
more like ~30x).
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14. Yikes. This is a Problem.
• Simple scenario:
– A VC invests $2M on an $8M pre-money valuation
company
– This gives the VC 20% of the $10M post-money
company
– To get 10x (forget about 30x) the VC will need a
$20M return
– At 20% ownership, that means that the company
must sell for $100M
– But … the average M&A deal is more like $20M!
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15. VC’s – Go Big or Stay Away
• To make the 10x work for the VC and still stay with
the average M&A exit of $20M, it would need to be
an investment of $1M with a pre-money of (only!)
$1M
• To be clear, the VC’s are not evil; they just have a
business model and LP’s with expectations
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Round
Typical VC
Expectation
Example post-
money
Exit needed
Series A 10x (up to 30x) $10M $100M
Series B 4x-7x $50M $200M
Series C 2x-3x $150M $300M

16. VC’s
Entrepreneur10 Entrepreneur1 Entrepreneur2
Entrepreneur3
Entrepreneur4
Entrepreneur9
Entrepreneur8
Entrepreneur7 Entrepreneur6 Entrepreneur5
$$ $$
$$$$
VC Perspective
Different Perspectives, but:
VC’s will Protect their Model
• VC’s may fight to keep a company going longer even if the
entire management team and angels feel it’s better to sell
• Techniques: create separate voting classes (preferred) where
each class must approve exits; “protective provisions” with
veto rights; control of the Board; and more
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20X
10X
Entrepreneur
Vision
Hopes/Dreams
Angels VC’s
$$
Entrepreneur/Company Perspective

17. Pre $2,000,000
Investment $500,000
CEO 40%
Staff 40%
Angels 20%
VC 0%
Post $2,500,000
Angel Round
Angel Round of $500K at $2.5M post
Let’s See What Could Happen in a
Real-world Scenario
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VC Round
$10,000,000
$3,000,000
31%
31%
15%
23%
$13,000,000
VC adds $3M
at $10M pre
M&A Offer
$40,000,000
$12,307,692
$12,307,692
$6,153,846
$9,230,769
M&A offer at $40M
x Return
12.3
3.1
Multiples
• Great exit for CEO/Founders/Staff - $24 million for them
• Angels see a 12x return
• VC sees a (mere) 3x return and may veto the transaction
This example assumes all shares are Common; if 1X PP, then the VC return is 3.8x

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OK, that was fun …
Let’s assume you’re funded.
Now, what do Buyers want?
(and never forget, you want to be Bought
and not Sold!)

19. What Buyers Look For
Exciting Stuff
1. The Product
2. The Team
3. The Vision
19
More Boring Stuff
1. IP Ownership
2. Cap Table
3. The Team
“Sets the Hook”
“Lands the Fish”

20. Being Ready for a Successful Exit
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Ensure there is always something attractive to be bought:
1) Product/service with Value, 2) Solid Team, & 3) Strategic Long Term Vision
Consistent and Shared Exit Strategy
Active Player in Market and Ecosystem
Ensure your Exits Options are Always Open

21. CEO = “Chief Exit Officer”
• The Exit: Just another business process
– Like marketing, sales planning, budgeting, quality
management, product development, etc.
• No need for it to be a distraction
– Manage with the team like anything else
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Given that 90% of successful outcomes are M&A it
would be pure negligence for a company’s management
team to not have this be a top level business focus!

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Good Luck!
Bon Chance!
Thank You!
Merci Beaucoup!