The fit, the fat and the geexy: what’s your startup’s terminal value?
In my not-so-long-yet but intense VC career, I’ve been often put in a position of thinking about startup exits. Many things are said about this by VCs, founders, advisors and the ecosystem, and you can find a supporter for pretty much every thesis on it.
I can think of two extreme statements at both ends of the scope:
- IRR-in-a-box sellers: startup founders who come up with detailed slides about the exit strategy — 70% of them mentioning the GAFA, and a vast collection of shining logos of Fortune 500 companies. Some push even harder and present us an “expected exit value”, and calculate a multiple and an IRR. 12x multiple guaranteed! Wow! Where do I sign?
- World-change dreamers: investors and founders who cannot come up with one potential buyer for the startup rightaway, but are convinced that the only key to think of is to create growth and value, if you create enough of them, there will necessarily be a buyer. I tend to think this way, but this generally requires time and deep pockets for follow-on investments.
Even if I’m more of the second school of thought, it doesn’t preclude you from thinking about the nature of the asset a potential buyer will finally buy.
I don’t claim to be exhaustive, but I can name 3 of them that cover pretty much all the spectrum of acquisitions.
1. The fit: you’re buying sustainable, substantial cashflows. It’s the easiest one to understand. The startup is generally a top player in a niche market, led by execution ninjas who keep costs lean and seem able to generate huge cashflows in the future. Typically a good target for secondary funds or opportunistic strategic buyers.
2. The fat: you’re buying an entry ticket to a market, be it on the supplier or the customer side. It’s generally the hardest way to go because the inventory needs to be big (hence “the fat”). Indeed, it implies that you’re acquiring and aggregating a big but atomized and generally hidden supply or demand. Think of Booking for instance, which built a large inventory and access to small and dispersed hotel industry players, before being taken over by Priceline.
Note that these two strategic values are time-consuming, because you need to build a large inventory or a very profitable company. It results in high exit values, very mediatic but sometimes lower IRRs. It’s the “low-tech” play of most contemporary VCs, including us at XAnge.
The third type is a bit different, seems to be quicker to build (even though some heavy R&D might be required) and hence to exit.
3. The geexy: you’re buying a top notch technology. These geeky and sexy tech-heavy startups (the “geexy” word came to my mind when discussing with a young CEO of a deep learning startup, but when I Googled it I ended up with funny adult-only pics… doesn’t matter) are often founded by young tech-driven engineers, need some help in the go-to-market and business model, but provide a first-class solution to a determined problem. Given that tech is the asset, the exit tend to be quicker. Think of Algolia (not exited) and the likes.
Note that “acqui-hire” generally splits into one of these categories (generally the last one). Although this framework isn’t perfect, it may help founders see where their strategic value can be and focus on it.
Please don’t hesitate to comment for any answer, addition or insult :)
