Isn’t it ironic. One on hand, VCs stress the importance of building great companies and on the other hand they want to discuss potential exit paths even before they have invested.
This slightly schizophrenic situation is according to my experience pretty correct and I’ll try to explain why:
At Creandum we don’t believe in building hype companies or quick flips. We will only invest if we really really think that we can help build a great company.
And great companies are bought, not sold. This means building a company that has a sustainable business model and can control its own destiny and thus preferably choose the timing for either an IPO or a trade sale.
This takes time. In our study of 300 Nordic technology exits, the average time from when the company was founded until there was an exit was close to 10 years and increasing over the last 5 years.
So why are we talking exit scenarios with entrepreneurs even before we have invested?
It is important that the entrepreneur is aware of that eventually we need to sell our shares (usually this means a trade sale of the company). It is sort of an acid test that the founders are at least thinking through what it means to bring on a VC.
Another aspect is that talking about potential exit paths actually is a really good way to understand the market dynamic and the value chain. It also helps us to learn if the entrepreneurs have a good grasp of what value they can add to the value chain and if we have the same view.
Specific questions could be:
- What position is strategically most important in the value chain and why
- Where will existing players move and what will this mean
- Is there a risk that we’re heading towards a position where there will be fewer exit possibilities
- How could our business model or sales strategy affect the value of the company (e.g. licensing out technology vs product sales; perpetual license vs monthly subscription)
Some of the above questions relate more to competitors but often entrepreneurs omit the long-term competitors that lure in the background (e.g. Google, Microsoft etc) or get stuck in discussions about what the competition can do today rather than what they will do tomorrow. As these companies however often are thought of as exit candidates it is sometimes easier to have meaningful discussions from the exit perspective to understand the drivers that can make them competitors as well as acquirers.
Finally, we believe strongly in establishing a joint ownership plan between all owners (founders as well as investors). As such, it becomes inevitable to talk through various exit scenarios. Are we aiming for an IPO? What’s the time frame, what needs to be achieved? What strategic decisions might affect the company value? What capital requirement do we think we will have in building the business? All these questions are tightly connected to questions about exit expectations and are very useful to talk through already during the investment period.