“Exit Strategy” is not an oxymoron
In some circles, it’s considered blasphemy for VCs and founders to even bring up exit strategy in the early stages of a startup. The logic is that by considering exit potential, you are demonstrating that you don’t have the passion required for the long journey of a startup.
But whether we want to admit it or not, some companies are at least partly started and funded for their short-term exit potential. And although near-term M&A potential is impossible to predict ahead of time, based on my experience, here are some leading indicators for likelihood of a near-term exit that can help those choosing to pursue this strategy.
The Disruptor Factor
When a large, technology driven company is disrupting a space with multiple large incumbents, this may scare the incumbents into using M&A to supplement their R&D efforts.
A prominent example of this is the automobile market. As Google and Tesla have pushed forward into autonomous driving in a very public way, GM and Uber have recently purchased early stage self driving tech startups for large amounts in order to effectively compete.
Another example is in the medical imaging market, where IBM bought Merge Healthcare in part for their billions of medical images and for their presence in the Picture Archiving and Communications System (PACs) market. As IBM’s Watson enabled PACs system continues to educate the market about the value of deep learning diagnostics, I predict the various industry incumbents will use M&A to keep up.
Outsourced R&D
Executives in market leading companies, especially those working in product and occupying customer facing roles, have a unique vantage point as to what’s next in their industry. In cases where they have specific insights into critical missing functionality on their company’s product roadmap that are better addressed in a startup environment, they can may make for good short-term acquisition targets.
For example, before StreamOnce (a former LionBird portfolio company) was founded, members of their team worked in the enterprise collaboration space in product management. In this role, they saw first-hand that adoption of collaboration software would be limited without integration of systems, and set up StreamOnce to bring together the fragmented collaboration systems of enterprise (Jive, Yammer, Chatter, Box) into one inbox. Shortly after StreamOnce proved the product value with a few customers, it made sense for Jive to go ahead and purchase them, resulting in a successful exit for all involved just nine months after investment.
The Tuck-in
As partnerships are typically struck between companies with complimentary, additive services, it makes sense that successful partnerships can be considered leading indicators for future acquisitions. In addition, M&A risks around integration, market, and culture can be significantly reduced via partnerships as corporates and startups get to know each other, enabling acquirers to focus less on risk and more on plugging the startup business case into their financial models to determine an acquisition price.
Exit strategy does not negate passion
As a VC filling out your internal investment memo or a startup founder building a pitch deck, even if you are in it for the long-term, there is value to critically considering if there is a compelling case for M&A opportunities early in a startups life. Using the three narratives listed above, you can begin to objectively assess your probability of experiencing a successful near-term exit.
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