Exit Strategy - Nice to Have or Need to Have?

Exit Strategy Nice to have or need to have? Author: Eva Hukshorn

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Eva Hukshorn: An introducHon

•  Work Experience -  Current: Partner EFactor

Board of Advisory: TreFoil Energy / CleanDrinks / Global Thinkers / ShowLinq

Coach Startup: Bootcamp Amsterdam / New Venture McKinsey -  2009 – 2010: Dutch BouHque – Marktlink Mergers & AcquisiHons, Amsterdam -  2007 – 2009: Royal Bank of Scotland – Corporate Finance, Amsterdam -  2004 – 2009: ABN AMRO – Corporate Finance New York, Amsterdam -  2003 – 2004: Accenture – ConsulHng London, Amsterdam

•  EducaPon -  1997 – 2002: MSc Economics, Finance – University of Groningen, the Netherlands -  2003: InternaHonal & Asian Studies – NaHonal Sun Yat-‐Sen University, Taiwan -  2009 – 2011: CerHfied Management AccounHng (CMA) – InsHtute of Management Accountants

(IMA), United States -  2009 – 2011: Colloquium General & Modern Art – Academy for History of Art, the Netherlands -  2012: InternaHonal Financial Report Standards (DipIFR) – AssociaHon of Chartered CerHfied

Accountants (ACCA), United Kingdom

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Webinar Program Overview 2012

June 19: Business Plan WriHng -‐ A Roadmap to Success July 3: Pitching & PresentaHon -‐ 3 Minutes, 1 Impression July 17: Strategy -‐ A Vision for the Future, A Strategy for Geing There July 31: BudgeHng & ForecasHng -‐ PredicHng the Outcome Aug 14: Working Capital -‐ An Unknown Key to Success Aug. 28: Capital Management -‐ Playing with Risk Sept 11.: Funding & Investments -‐ Some Sources are More Equal then Others Sept. 25: ValuaHon -‐ Art or Science Oct 9: Exit Strategy -‐ Nice to Have or Need to Have? Oct. 23: Bootstrapping -‐ An AlternaHve Answer to Funding Nov 6: Crowdfunding -‐ The Power of Friends, Family and Fools Nov. 20: Networking -‐ Nice You have 3000 Friends, I have 30 Relevant ConnecHons Dec. 4: MarkeHng & (Social) Media -‐ Noise or Value? Dec. 11: No Sales, No Glory Dec. 18: Most Common Mistakes of Entrepreneurs 5

Exit strategy: Nice to have or need to have?

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2012 2013 2014 2015 2016

Business Plan

Product development

Prod. A

Beta test

Product development

Going to market US

Alpha Customers

Get work space

Product development

Prod. B

Beta test

Going to market

Expand in EU + India

Break-even

Promotion campaign

Employees 3 5 8 10 12 15 20 25

Promotion campaign

Capital need: USD 150k 2nd round: USD 1mio 3rd round: USD 3mio

M M E

Revenue / margin 200k / 10% 1mio / 17.3% 4mio / 21% 12mio / 28%

EXIT USD 25mio

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1 PreparaHon is key 2 Increase chances of success

3 Company purpose shortens

exit Hme

4 PreparaHon increase exit

valuaHon 50%

A successful exit strategy is like project management: preparaPon leads to increased success on all fronts

5 Increased chances of funding

6 Align investors

7 Sales pitch

8 Keep it simple

It is just another project management track

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The importance of a company culture for success

SUCCESS

FAILURE

Founders Culture + Investors

culture

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Average life cycle of a startup

REVENUES

PROFIT

No revenues OperaHng losses

Small revenue Increasing losses

Growing revenues 1st signs of profit

Idea: Pre-‐Seed Building: Seed Growth: Early & Later Stage

ASSSITANCE TO GROW

PRODUCT DEVELOPMENT

+ SALES

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VALUE

TIME

Idea: Pre-‐Seed Building: Seed Growth: Early & Later Stage

Value creaHon in a startup life

START COMPANY

INVESTORS ON BOARD

ASSSITANCE TO GROW

INVESTORS ON BOARD

EXIT PREPARATION

EXIT

STARTING UP: 10% value

EXECUTION: 50%

EXIT PREPARATION: 40%

VALUE

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Increased exits of smaller companies

1.  Mark Zuckerberg is an excepHon 2.  Trend of smaller exits 3.  No private company data 4.  5.000 US tech companies sold per year for an average of USD 15mio 5.  Value from USD 0 to USD 20mio is the hardest 6.  Opportunity for experienced founders & investors

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The influence of Venture Capitalists and Angel Investors on exits

Source: Basil Peters

EXIT MULTIPLES

EFFECT

ON SUCC

ESS CO

MPA

NY

20%

10%

0%

-‐10%

-‐20%

LOSS

1-5X

5-10X

MORE FAILURES

FEWER 1-5X EXITS

MORE 5-10X EXITS

SLIGHT INCREASE IN HIGHER EXIT MULTPILE EXITS

10-30X >30X

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Your exit Hmeline will expire…

Source: Basil Peters RE

TURN

ON IN

VESTMEN

T (ROI)

5x

3x

2x

1x

0x

YEARS FROM INVESTMENT

4x

6x

0 1 2 3 4 5 6 9

Perfect Exit Window Decreasing ROI often

due to lack of preparation and hubris

Venture Capitalist delay exits when ROI are not met

10 7 8

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How Venture Capitalist can block exits

Research: •  Extend exit with c. 10 years Contract items to watch: •  Preferred shares to veto sale •  Board posiHons •  CondiHons to exit

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ValuaHon: Comparable Analysis: a relaHve valuaHon method

Comparing your company with other companies, transacPons or relevant items based on comparable rates to determine your (implicit) value EXAMPLES OF MULTIPES: •  EBIT mulPple = Company Value* DIVIDED BY EBIT

–  how much Company Value is US$ 1 of EBIT worth

•  Equity value per member = Total Equity Value DIVIDED BY Total members –  How much Equity Value is 1 member worth

•  Equity value per Eye Ball = Total Equity Value DIVIDED BY Total website visitors –  How much Equity Value is 1 visitor worth

Note: Company Value = Equity Value + Long Term LiabiliDes -‐ Cash

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ValuaHon: Comparable Analysis: problems for startups

•  What do you scale value to?

•  Who are your comparable companies?

•  How do you take survival or other risks into account?

Ø 20% small company discount Ø Note: much more different kinds of mulDples exist: P/E, EBIT/Sales, Equity Value/Sales etc.

Startup

Earnings(before(Interest(&(Taxes $10

Total(Members 10,000

Visitors(Website(p/m 30,000

Industry,Average,Multiples

EBIT(Mutiple((Company(Value(/(EBIT) 5.3x

Equity(Value(/(Member 98.0x

Equity(Value(/(Eye(Ball 54.0x

Implied,Value,Startup

Company(Value $53

Equity(Value $980,000

Equity(Value $1,620,000

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ValuaHon: Venture Capital Approach: Formula & AssumpHons

Post-‐Money ValuaPon = Terminal Value or ValuaHon at Exit

DIVIDED BY Return on Investment (ROI)

SIMPLE VERSION -‐ ASSUMPTIONS: •  No share issuance ater first round •  % of ownership remains constant unHl exit

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ValuaHon: Venture Capital Approach: Terminal Value

DeterminaPon Terminal Value: 1.  Revenue in exit year 2.  Industry standard profit as % of revenue 3.  Expected Net Profit 4.  Comparable Price per Share / Profit = P/E raHo

EXAMPLE:

Startup

Revenue&at&Exit $&45mio

Industry&profit&margin 20%

Industry&Equity&Value&/&Profit&(=P/E&ratio) 8x

Expected&profit&at&Exit $&9.0mio

TERMINAL/VALUE $/72mio

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Venture Capital Approach: Return on Investment (ROI)

ROICash(Invested(

MultiplePre5Seed(Capital 75%+ 20x

Seed(Capital 60% 10x

Early(Stage(Capital 50% 8x

2nd(Stage(Capital 40% 6x

3rd(Stage 30% 4x

Bridge 20% 2x

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Venture Capital Approach: Pre-‐Money ValuaHon for Seed Capital Startup

Post-‐Money ValuaPon = Terminal Value or ValuaHon at Exit

DIVIDED BY Return on Investment (ROI)

Post-‐Money ValuaPon = US$ 72mio / 10x = US$ 7.2mio

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ValuaHon: Discount Cash Flow

•  Sum of all present value of future discounted cash flows + terminal value •  Terminal Value:

Free cash flow 2012 2013F 2014F 2015F 2016F

FCF 9,324 10,855 11,472 11,900 12,302

Cost of capital (WACC) 0.0 9.1% 9.1% 9.1% 9.1%

Discount factor 0.917 0.841 0.771 0.707

PV of FCF 9,953 9,644 9,172 8,694

gWACCFCF

−T

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1 RaHonal assistance in emoHonal Hmes

2 33% of M&A transacHons fail

3 Increased failure rates with no (strong) advisors

4 General process management

Select M&A advisors on the Click you have with them

5 Playing chess

6 ReputaHon

7 Local

8 Expensive but worth it

Don’t do an exit by yourself, get advisors on board!

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The Exit Coach

Exit coach versus M&A advisor 1.  Determining exit strategy in the very beginning 2.  Early involvement compared to M&A Advisors 3.  Exit with the coach and without an advisor Role Exit Coach: •  ValuaHon •  Chances of success •  Exit strategy planning •  IdenHficaHon of milestones needed to be reach before sale •  SelecHon M&A advisor

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Maximize value through mulHple bidders

Safety: •  33% of the transacHons fail Predictability: •  The sale is definitely going to happen one way or another NegoPaPon strength: •  Bewer deal terms Maximize value: •  Increased awracHveness EffecPve governance: •  Picking the best deal

Companies are sold, not bought.

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Strategic value to increase exit value

Reason to buy: 1.  Increase value of company being acquired 2.  Acquired company increases value of buyer 1 + 1 = 3: •  Take out compeHHon •  Understanding synergy for buyer •  Making sure the buyer understands your business potenHal

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Built to flip

What is it? •  Serial entrepreneurial mindset •  Building fundaments to sell Built to flip AND last:

–  Solid team –  OrganizaHonal structure –  Healthy culture – Winners

Conclusion & final remarks

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BUILT TO FLIP AND LAST!

Unlock STRATEGIC VALUE

MULTIPLE bidders

Use an ADVISOR

Keep EMOTIONS OUT of valuaHon

Start AS SOON AS POSSIBLE

PREPARATION is key

Exit Strategy is NECCESARY

Webinar Program Overview 2012

June 19: Business Plan WriHng -‐ A Roadmap to Success July 3: Pitching & PresentaHon -‐ 3 Minutes, 1 Impression July 17: Strategy -‐ A Vision for the Future, A Strategy for Geing There July 31: BudgeHng & ForecasHng -‐ PredicHng the Outcome Aug 14: Working Capital -‐ An Unknown Key to Success Aug. 28: Capital Management -‐ Playing with Risk Sept 11.: Funding & Investments -‐ Some Sources are More Equal then Others Sept. 25: ValuaHon -‐ Art or Science Oct 9: Exit Strategy -‐ Nice to Have or Need to Have? Oct. 23: Bootstrapping -‐ An AlternaPve Answer to Funding Nov 6: Crowdfunding -‐ The Power of Friends, Family and Fools Nov. 20: Networking -‐ Nice You have 3000 Friends, I have 30 Relevant ConnecHons Dec. 4: MarkeHng & (Social) Media -‐ Noise or Value? Dec. 11: No Sales, No Glory Dec. 18: Most Common Mistakes of Entrepreneurs 28

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Thank you!

This document was prepared by Eva Hukshorn. Several people and organizaPons have inspired

her to write this presentaPon, amongst which are, but not limited to the Founders of EFactor,

ABN AMRO/RBS, University of Groningen, InsPtute for Management Accountants