Startup investing : Exit dilemmas & early stage investing eco-systems

Author : Atim Kabra

Source : From LinkedIn Archives

Date first published : January 15, 2016

Investing is easy in the start up world. Difficult part is managing growth and continuously fine tuning strategy to adapt to an ever changing world. And the most difficult part is generating an exit.

Provided you find a buyer, the sheer difficulty in getting all stakeholders- founders, management, multiple angels, series A,B,C….etc) on a common platform and to agree to a sale is challenging to an extreme.

Preparing for a successful exit requires an acknowledgement that you have run your course as an independent entity and the obstacles currently being faced by the business, though may not be unsurmountable, yet have the potential for distracting valuable time, effort and energy from the core task of generating growth.

These obstacles can manifest themselves in myriad forms. The biz may be running short on cash, may be high on receivables, receivables may not be turning into cash as envisaged, key personnel may have significant discord amongst themselves, an inability to attract suitable talent to join and then stay with the company, an inability to raise new cash to sustain business at the desired valuation or the sheer irrelevance of the business model itself. Faced with such challenges, it becomes critical for the company to embark on mid course corrections in strategy and identify gaps in business model of potential buyers which the sellers business model might be able to fill. Sounds logical but in real life, it requires mature minds to acknowledge the truth staring in the face and then decide to throw in the towel on their own entrepreneurial dreams in order to accomplish such sales.

If i look back at the two exits in 2015, I find reflections of the above factors in various combinations at play in both the cases. An entrepreneur struggles to create a viable business and the challenges which he has to bear on his shoulders, alone, most of the times, can be daunting to put it very mildly. The fact that you are being bought implies value in the model being pursued with the accompanying allure of significant riches down the road if you were to endure the hardships and eventually prevail. To quit midway is to leave a lot of potential moolah on the table and this is a very hard call to make.

For the buyer, usually the acquisition plugs in a gap in the product portfolio, widens the core offering, saves time to market and brings in an additional client portfolio along with marketing and technical talent which can strengthen its own positioning in a competitive arena. Of course, the buyer want to get away paying a minimum while the seller wants to optimize whats on offer. The interesting part here is the economics of absorption of the selling team into the buyers team. Positioning of the incoming team, their compensation and incentives and alignment with the objectives of the existing team are critical for any successful transition on to the new company and is often what determines the success or failure of any acquisition.

But it is critical that there exist enough participants in the system to constitute a critical mass of buyers and sellers. A large enough pool of players in the same pond ensures brutal competition amongst the participants to bring out the optimality of the business model in play. Eventually capital flows towards the potential winners and others are absorbed into the stronger players or fall by the wayside to create a sustainable business. There are a few interesting markets which come to my mind where a start up eco system has emerged and surprisingly enough in different conditions.

*USA
*India
*Singapore
*Israel
*UK
*Jordan
*China
*Taiwan

USA has had the cluster approach and Silicon Valley led the space in ensuring the presence of almost all ingredients required for successful creation of a business — right from the germination of an idea to its eventual establishment as a sustainable business. Ideas, Capital, Critical business contacts, Mentorships, Competitors, Imitators, Bankers, Advisors and Believers all exist in a symbiotic relationship and thrive in the presence of each other. Great news is the rapid expansion of such clusters to cover multiple cities — Greater Boston, Greater NYC, The carolinas, Seattle, Austin etc. This can only mean constant flow of new ideas and the natural attrition process so required to keep the model working.

India: I can sense energy building up beyond the three successful clusters already well established. Bangalore leads with Delhi NCR region and Greater Mumbai not too far behind. Interestingly, like the USA, the ecosystem has mostly grown on its own. My friends tell me of serious policy work afoot to further boost India as a StartUp nation and an announcement is expected as early as Mid — January. Time will decide whether government intervention is necessarily a good thing.

Ongoing wars, a massive investment in indigenous military technology, well educated populace, close ties with US military industrial complex and high mobility between USA and Israel has resulted in a flourishing tech start up scene in Israel. Something similar happened in Taiwan which became a hardware backend for the American IT companies. Needless to say Taiwan has produced a lot more tech start ups in the hardware space than software and solutions

The role of positive government intervention is clearly evident in the case of Jordan and Singapore. Jordan is the base for start ups targeting the population of Middle East while in Singapore the government is building from scratch the entire eco system in which startups can flourish. This encompasses the entire spectrum from promoting an entrepreneurial culture, celebrating entrepreneurs, providing seed money and mentors and importing talent where required to fill in the gaps that exist in the eco system. The role of various government arms like Spring and IE are tied deeply to the success of startups which also involves importing IP and entrepreneurs to be based in Singapore and expand into the rest of the world from here.

China is blessed with the triumvirate of BAT (Baidu, Alibaba and Tencent) with their massive market capitalization and they are locked in a race to broad base and deepen their offerings to lock in customers. This is resulting in natural buyout candidates finding willing buyers ready to pay a premium to absorb successful new ideas into their widening eco system.

I believe that taken together, startups are well established as a force for greater good with potential to unleash creative solutions at existing problems, create wealth & employment and enhance efficiency across sectors. The existence of continuously deepening eco systems is a harbinger of good times to come.

Happy investing in 2016.

Value shall accrue to true believers — buy a good idea and a good team and at the right price… And work hard with them to grow them big.