If you're trying to sell your company, then you have two products: what you sell, and the company itself. Knowing who your likely acquirers are means you can tailor the organization to potential buyers, just as you'd design a product for specific customers. In this session, we'll look at how to adjust your tone, staff, geographic location, pricing, and every other aspect of your business to make yourself an easy target for buyers.

1. Be Ready to be Bought!Your Company is your Product Randy Smerik Founder/CEO, Osunatech, Inc. randy@osunatech.com 1 Montreal Startup Festival July 13-15, 2011 Randy Smerik

2. 2 Fundamental Premise: Having a Business Focus on Exits and your Exit Strategy is Healthy and Good for You Let me show you why … Montreal Startup Festival July 13-15, 2011 Randy Smerik

3. Context: 4 Business Outcomes 3 Our focus is here Montreal Startup Festival July 13-15, 2011 Randy Smerik

4. IPO versus M&A Venture ExitsVC backed liquidity events 4 Since 2000, median is 90% of exits are M&A Montreal Startup Festival July 13-15, 2011 Randy Smerik

5. M&A Transaction Volume by Deal Size Private Targets - Internet, Communications & IT Infrastructure Software & Services M&A – Q1’2011 5 Average M&A transaction is $12M and median is $10M source: SagePoint Advisors Montreal Startup Festival July 13-15, 2011 Randy Smerik

6. 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” 6 Montreal Startup Festival July 13-15, 2011 Randy Smerik

7. 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 VC’s require that mentality to support their business model 7 Montreal Startup Festival July 13-15, 2011 Randy Smerik

8. Trends in the VC World 8 Montreal Startup Festival July 13-15, 2011 Randy Smerik

9. Issue: VC’s need a 10x-30x Return Why? Limited Partners in a VC fund expect ~20% return per year (6x their money over 10 years) 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 ~30x. 9 Montreal Startup Festival July 13-15, 2011 Randy Smerik

10. 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! 10 Montreal Startup Festival July 13-15, 2011 Randy Smerik

11. 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 different model and LP’s with expectations 11 Montreal Startup Festival July 13-15, 2011 Randy Smerik

12. Entrepreneur1 Entrepreneur2 Entrepreneur10 $$ $$ Entrepreneur3 Entrepreneur9 VC’s Entrepreneur8 Entrepreneur4 $$ $$ Entrepreneur7 Entrepreneur5 Entrepreneur6 VC Perspective Different Perspectives, but:VC’s will Protect their Model VC’s will typically 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 12 Vision Entrepreneur Hopes/Dreams $$ 10X Angels VC’s 20X Entrepreneur/Company Perspective Montreal Startup Festival July 13-15, 2011 Randy Smerik

13. Angel Round of $500K at $2.5M post Let’s See What Would Happen in a Real-world Scenario 13 VC adds $3M at $10M pre Multiples M&A offer at $40M Great exit for CEO/Founders/Staff - $24 million for them Angels see a 12x return VC sees a (mere) 3x return and would likely veto the transaction Montreal Startup Festival July 13-15, 2011 Randy Smerik

14. Being Ready for a Successful Exit 14 Ensure your Exits Options are Always Open Active Player in Market and Ecosystem Consistent and Shared Exit Strategy Ensure there is always something attractive to be bought: 1) Product/service with Value, 2) Solid Team, & 3) Strategic Long Term Vision Montreal Startup Festival July 13-15, 2011 Randy Smerik

15. Successful Exit: Checklist Items Have an “exit strategy” just like you have a “market strategy” Ensure anyone who shares ownership shares your exit strategy Watch out for “super rich” co-founders (may want 10x) Study all Term Sheets, By-laws, and Management Rights docs Own all IP (if possible) Carefully firewall any 3rd party dependencies Don’t need revenue – in fact, it can be a liability Ensure all company and IP Rights docs are solid Be sensitive to company location Create and leverage any and all “forcing functions” 15 Montreal Startup Festival July 13-15, 2011 Randy Smerik

16. 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 This is not “flipping” a company – instead it is growing a solid company ready for a great exit 16 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! Montreal Startup Festival July 13-15, 2011 Randy Smerik

17. 17 Good Luck! Bon Chance! Thank You! Merci Beaucoup! Montreal Startup Festival July 13-15, 2011 Randy Smerik