PS#056: Exit Analysis – Bonus Tips & Tricks (Part 5)
Alright, we just finished a deep dive on the exit analysis process for venture capital.
If you missed it or are just joining us, give the following issues (listed below) a review before diving into this one.
Today, I want to give you three ways I’ve used this information to really build my personal brand with startups in the market.
For what it’s worth, I believe that it’s this type of intel, preparation, and expertise that will allow you to win deals and succeed as an investor over the long-term.
Let’s discuss in more detail.
1) Winning in diligence.
The value of this information starts in diligence.
It’s not just that this information will help inform better investments, but it’s also very valuable information for those founders and teams building for their own successful outcome.
While investors are investing their capital for ownership, startup founders and employees are investing their time, blood, sweat, and tears into the business in exchange for ownership. In either case, all parties are hoping that ownership will turn into a successful liquidity event.
If you have a strong grasp of the exit landscape (with underlying data and evidence), you can prove your value before officially making the investment. You’ll be able to provide an educated perspective and detailed information on what “success looks like” for this company.
This level of detail will show the company that you’re not just a tourist in this space, but someone who understands the business and this market intimately.
In my personal experience, this has happened with almost every single one of my investments. Due to my style of investing, I’m rarely the highest bidder. More often than not, I spend my time and energy demonstrating that I am the right partner for the business.
Diligence is where I can make this happen, but it only works if I am prepared.
2) Guiding the roadmap.
Startups are using all sorts of information sources to guide their company and/or product roadmap. That may include their own experience, gut intuition, customer feedback, etc.
While all of those data points are important, another key source is how the market will value the startup’s decisions and product offerings. This may speak to the ROI of investing in a new product feature, solution, business model, pricing plan, market, etc.
If you can layer these details into the conversation, founders and management teams will have a much better understanding of where they should be spending their time and resources.
This has (again) proven to be a very useful asset that I can bring to the table for my portfolio companies. In one situation, I helped the management team (and co-investors) think through the expansion of the product platform. In the early days, the company was providing contract analysis for in-house legal teams. However, it was clear (based on our research) that the platform would need to expand to more elements of the business (i.e., sales, finance, HR, etc.) to really be successful and reach the return we all envisioned for the business.
Not everyone was onboard with this approach in the beginning.
It took many conversations and a lot of detailed analysis to show that this would drive value for the company in the long-term. Ultimately, the knowledge we had around what was “truly valuable” in the market helped convince some of the investors and the Board that this was the right path.
It ended up locking an incredible revenue opportunity for the company, allowing them to eventually become a leading solution in the space.
3) Adding value in the Boardroom.
The Board has a fiduciary responsibility to find the best possible outcome for the business.
In order to manage this fiduciary responsibility, we must understand the exit options available to the company. If you’ve done this analysis, built the right banker and acquirer relationships, you can add A LOT of value as an investor (even early in your career).
In the early days of my career, I focused on building a lot of these relationships. For some of my earliest investment, I was able to call upon these relationships to provide key insights on the exit options the startup had in front of them. I’ll give you a few quick examples…
Additional Capital: For one of my portfolio companies, I was able to leverage my banking relationships to help the startup sell a portion of the business and acquire additional capital to support the company’s pivot.
Fund-returning Exit: For another portfolio company, I brought in another boutique bank to run an exit process for the company. Thanks to our understanding of the space and exit landscape, we were able to work with the portfolio company to create a fund-returning exit (something I hope to speak about in more detail in a future issue).
Strategic Acquirer Intel: In another situation, one of our portfolio companies was gaining interest from several strategic players in the space. Due to our relationships with those strategics, we were able to provide key insights that allowed the management team to negotiate the best outcome for investors and the startup.
If you don’t know your space (and even more so your exit options), it’s really hard to provide this level of detail and value in the Boardroom. A lot of investors are spread so thin with their investment areas that it’s hard to provide this level of detail and value.
However, if you are prepared for these conversations, when the time comes, you’ll show real value to your portfolio company. This will build your reputation with the management team, increase your value to other startups in the space, and highlight your expertise with other investors.
I share all of this from personal experience.
I didn’t (and don’t) necessarily have the same level of experience as other investors. I’ve only been in this game for so long. However, by being prepared, by taking this stuff seriously, I’ve built my reputation brick by brick.
You can do this too.
Follow the steps I’ve outlined in the previous issues and provide value when your portfolio companies need it most.
