Quick recap of recent M&A - Yahoo sold for broadly 1/10th the price that Microsoft offered  several years ago,   Jabong sold for broadly 1/10th  the price that was being discussed with global ecommerce majors a few years ago.

Given the recent M&A activity both globally and close to home, I thought I would revisit the topic of exit timing which I wrote about a few years ago (http://indianvc.blogspot.in/2011/08/timing-of-exit-is-very-important.html).

I have found that it is very difficult for an entrepreneur, management and/or investors to take a decision to exit when there is no immediate stress on capital - either when there is capital in the bank or there is an impending financing round. And this challenge amplifies when the company is growing as it can sometimes make a company less vigilant on potential future headwinds the company may face.

So when is the right time for a founder/management to start thinking of an exit, despite cash in the bank?  Here are some tips -

People - There is fatigue or lack of passion at the founder or leadership level.  Or  it is hard to attract or retain key talent in the company. Or there is a strong disagreement amongst the various stakeholders on the way forward.

Approach - The approach to solving the problem is either not working or not scaling. Revenues cannot scale without scaling costs proportionately

Market - The market is either not large enough, or the competitive dynamics in the market puts pressure on current business model

Obviously the company must attempt to do whatever it can to address the challenges above and continue to build value and not give up at the sign of the first road bump. But what is important is that a timely and critical assessment is made on whether the company really has a strong  passionate team focused on differentiated and scalable business model in a large enough market or are their certain team or market headwinds in the near to mid term that will be hard to surmount and it is best to find a strategic home for the company.  This assessment is not only extremely tough in an ever changing dynamic market environment but also is emotionally challenging for the founder especially if there is strong passion for the company.  And often the responsibility lies with the investors and the board to  provide the sound and dispassionate counsel to the entrepreneur. 

As we have seen in the recent M&A highlighted above, a mistimed exit of a company can cause major loss in shareholder value, employee morale and employee opportunity cost.





 

I was speaking to an entrepreneur in our portfolio who was going through a major pivot and asked him how he was feeling given the last few months of dealing with the business model change, jittery investors, confused employees, etc. We believe in the entrepreneur and continue to back him.

His reaction was that he is more charged than ever now. He has realised his past mistakes, has learned from it. He believes his BIGGEST MISTAKE WAS NOT PIVOTING EARLIER. He believes that the problem he set out to solve with his earlier company still exists,  it is a large problem that needs to be solved. However, the approach to the problem has to be a lot more differentiated and focused.  He understands the quality of revenues matter. They should be recurring and profit yielding. Customers need to love the product at a price/cost that allows the company to build a profitable franchise. He has spent time internally speaking to his employees and explaining to them the rational of the pivot and everyone seems to be on board with the new direction the company has taken. While I am hopeful that the new direction will work, but what is clear is that the old business was not working and the faster there was realisation around this, the better.

Many entrepreneurs face the problem of product-market fit. It is the nature of company creation. When I was an entrepreneur, I faced it and had to adapt/innovate very quickly. If I didn't, I wouldn't have survived.  Many times, the difference between a failed and successful entrepreneur is not smarts or passion. It is intellectually honesty with themselves and their team early in the company's lifecycle that their current business is hitting a wall, and perception/intuition to figure out a new opportunity that can leverage the companies capabilities to create a sustainable enterprise.

I tell most entrepreneurs I meet - "Don't be afraid to fail early if you think it is not working." Admitting failure sooner can save a lot of time and capital and help direct energies towards potential problems that may be solvable. And even if you cannot think of a pivot, it is better to fail fast and do something meaningful with your life as the scarcest resource we have in our lives is time!

 

As the saying goes, Great companies are built in tough times.  There is good reason for this. When there is an unforgiving financing environment, smart companies tend to focus a lot more on costs,  more emphasis is put on generating that extra dollar of revenue for the same cost,  low cost marketing innovations emerge, new initiatives put on hold, etc. While there is no reason to wait for a tough financing environment to engage in some of these company health activities, it is invariably in such times that great foundations and cultures are built.  There is a general fear that some of the layoffs and other cost reductions will reduce company morale, etc.  To the contrary, most cost rationalisations result in a happier productive employees.

Some practical tips for current entrepreneurs to build a healthier start-up -

1. Zero base your fixed costs -  Look at every cost and see if that would have been a cost you would incur if you had to start the company today. Would you rent the office you are currently renting? Would you hire as many people as you have in each function? Is there way to convert cash compensation to more equity?

2. Restructure variable cost (for e.g sales force organisation)  - Eliminate non performing sales professionals. Make a judgement call on the cost benefit of the top performing sales team. Sometimes top performers in a past year may not be as hungry to perform in the coming year. Younger hungrier talent at a fraction of the cost of a top performer may yield similar or better performance than someone who was a past performer and is not as hungry any more. Think of replacing the expensive performers with younger less expensive potential.  This philosophy holds for other variable costs like service delivery, etc too.

3. Focus on Customer ROI  - Understand your customer need better to see what more you can cross or upsell to them with the same resource/effort. In consumer facing businesses, don't waste monies on attracting consumers if you know that they will not be yield a positive return on customer acquisition cost

4. Think "Out of the box" in Marketing - Assess if there are other ways to achieve the same touch points. Invariably every company builds a lot of flab in marketing because it is very easy to justify a marketing budget.  Innovative channel partnerships, guerrilla on the ground marketing, Word of Mouth, PR, are some of the innovations worth experimenting with.