Week 6: Post-Investment Phase – From Involvement to Exit

Week 6: Post-Investment Phase – From Involvement to Exit

“The Post-Investment Phase – Equity Story … The Exit … Exit Routes – The Trade Sale … Exit Routes – The IPO … Exit Routes – The Buyout … Summary and Conclusion … The Entrepreneur’s View … The VC’s Perspective”
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Summaries

  • Week 6: Post-Investment Phase - From Involvement to Exit > The Post-Investment Phase - Equity Story > The Post-Investment Phase
  • Week 6: Post-Investment Phase - From Involvement to Exit > Experts: 6.1 + 6.2 > Experts: Control mechanisms and milestones for growing a VC-funded company quickly
  • Week 6: Post-Investment Phase - From Involvement to Exit > Experts: 6.1 + 6.2 > Experts 6.2: Control Mechanisms and Milestones for Growing a VC funded Company Quickly
  • Week 6: Post-Investment Phase - From Involvement to Exit > The Exit > The Exit
  • Week 6: Post-Investment Phase - From Involvement to Exit > Exit Routes - The IPO > Exit Routes - The IPO
  • Week 6: Post-Investment Phase - From Involvement to Exit > Exit Routes - The Buyout > Exit Routes - The Buyout
  • Week 6: Post-Investment Phase - From Involvement to Exit > Summary and Conclusion > Summary and Conclusion

Week 6: Post-Investment Phase – From Involvement to Exit > The Post-Investment Phase – Equity Story > The Post-Investment Phase

  • Because the equity story basically reflects the value you’ve built.
  • What’s happening then? Well, the work starts and it’s more important then that stage before because now adding value starts.
  • So you have to think about exit routes, you have to build the exit route and you have to build the equity story in order to realize that exit.
  • This is the first thing he thinks about and it’s fair to do that, again, from a VC’s perspective and it’s also good for you as the entrepreneur.
  • So building an equity story if you look at the Whatsapp example, again as you can see how it worked and and we already talked about that initially.
  • So they had a seed round of a quarter million which was a comparably low valuation and this is the equity story they built.
  • If you look at the seed round it’s for sure a great equity story and it even got better because that was then that nineteen billion exit to Facebook.
  • This is an equity story, it’s probably not the typical equity story because not every company can do a nineteen billion exit, that’ll be nice but it’s not happening but that’s what we are talking about, that is what we mean if we say equity story.
  • By the way, equity story is very important also if you deal with the VC because that’s his way of thinking, adding value in order to build that equity story.
  • This is what VC’s do, they need their business model so they think about realizing the business model and this is about equity story, so the best way to deal with that, it is your story, your equity story, you add the value and you want the same thing.
  • The VC does something and this is what VC investors will do and this is their involvement.
  • Sometimes they also help you on an operational level, not always but sometimes and depending on VC’s focus and expertise they can add more value.
  • Now they hopefully add value as I said that, that’s the second point and I already mentioned the contacts through their networking contacts to potential whatever.
  • I mean, that’s an issue people discuss: Do VC’s really add value? You remember Vinod Khosla, he’s probably an extreme standpoint saying 80% of the VC’s add negative value, others say they really add value and they’re great investors in the valley and everybody knows they are great investors in the valley and they already have added value.
  • We mentioned Michael Moritz who was on the board of Google and he added value on the board of Google, that’s for sure.
  • So he might not have the highest expensive to push your valuation up because you can buy additional shares quite cheap, so in order to build that equity story afterwards when he bought the shares, so careful with that point.
  • In general he sits in your boat, he tries to realize the equity story and at the very end the exit at some point and I wish to look at that in more detail in the following videos.

Week 6: Post-Investment Phase – From Involvement to Exit > Experts: 6.1 + 6.2 > Experts: Control mechanisms and milestones for growing a VC-funded company quickly

  • A good VC should be very active within the organization but the question is in what form and what shape.
  • I don’t believe that the VC’s and I don’t think it’s in their interest to actually run your company because that’s what you have to do with your executive team, that’s what they expect you to do.
  • So let’s first of all assume the VC invested in you and therefore you convince them that they believe in you as an individual, they believe in the executive management team, they believe in the vision, in the product and such otherwise they wouldn’t have invested.
  • At the same time because VC’s also helped other companies, they also normally bring interesting introductions to the Fortune 500, to the Fortune 1000 Global customers that with just one phone call or one email introduction, they’re opening the door for you to step in and then it’s up to you to follow through from a business development or sales perspective to generate revenue and increase your customer base.
  • So all of these are very helpful services that a VC should and will bring to the table.
  • So it is very traditional for somebody on the VC to sit on the board and therefore the board advises the leadership team on various strategic pieces of the business.
  • For my role particularly I’d say, you know I’m looking to partner with various organizations and VC’s are just very well-connected and so they can help provide those introductions as appropriate.

Week 6: Post-Investment Phase – From Involvement to Exit > Experts: 6.1 + 6.2 > Experts 6.2: Control Mechanisms and Milestones for Growing a VC funded Company Quickly

  • We have goals because we want to be great and we want to be able to serve as many students as possible and give them the skills to get jobs and get as many people jobs as possible, so I wouldn’t say that it’s a direct.
  • The VC said that these are our milestones and these are our goals, we have our goals that our leadership team has developed in and we all kind of believe in those goals but you know whether the VC had input or not, I mean, back to my original point about VC’s being on the board and board having input on strategic direction, perhaps.
  • Certainly a board of directors is your boss and a venture capitalist especially those who beat rounds, they tend to join boards and so and that’s just to be clear, we have several institutional investors and some who are not on our board with whom I speak less frequently, so I don’t want to overstate that analogy about the boss.
  • I mean any business in my opinion or organization should be run with those milestones and in any particular early-stage growing business needs to articulate those, be crystal clear on what they should be.

Week 6: Post-Investment Phase – From Involvement to Exit > The Exit > The Exit

  • That’s why VC’s need an exit and that’s why you as an entrepreneur should know that he wants to exit one day.
  • Exit is part of the post-investment phase when the VC is in and the VC gets involved and maybe you do another financing round.
  • At the very, the VC works probably from day one on his exit and you probably should do the same.
  • So you should start building your equity story, your exit route and so on.
  • Then if you want to do an exit it’s not only your performance but it’s also the market which is really important for your exit because not in every market condition exit can be the right time.
  • The third question is: Who is the potential buyer? Is it a financial buyer or is it a strategic buyer or in the case of IPO, that’s connected over here, is it the public? This is also and you probably start with that question first who is the potential buyer and then you think about what exit route is really necessary for your startup.
  • The VC will start asking the question very, very early on because it’s his business model, he needs to realize and it’s only being done with the help of your company and an exit of your company.

Week 6: Post-Investment Phase – From Involvement to Exit > Exit Routes – The IPO > Exit Routes – The IPO

  • Welcome to The Introduction to Venture Capital – The IPO, or as you can see on the slide here the initial public offering, that’s what IPO means.
  • Why do you do that?Because it gives you a chance on the one hand, and that’s interesting with an IPO, to raise more money because for the first tranche you offer to the public and the money flows into the company and secondly because your company is listed then publicly, the shareholders later on, after some lock-up period which is six months at least, have the chance to sell their shares to the public again.
  • If you sell to the public you have to tell them what your equity story after the IPO is, otherwise nobody wants to buy the shares because then you have no value increase in your shares.
  • Many of the companies are not ready for IPO’s.
  • I mean if you look at how many IPO’s are happening, there are more trade sales and mergers and so on than IPO’s, more bankruptcies by the way too, and if you compare that from country to country we have a lot more in the USA than in Europe and you have more in Great Britain than in Germany and so on, so an IPO market is important.
  • When the stock prices go down, I mean, you won’t get IPO premiums, you don’t do an IPO.
  • More important on the internal factors is, as I said, that is your company ready for an exit as an IPO? It has to be mature enough, it has to have an economic situation and perspective which you can sell to the public and you need own money.
  • I mean IPO’s are a costly thing, you might wanna get some bridge financing to do that but maybe you have the means to do that, so at least you have financials.
  • If you do a trade sale, the probability someone rules your company is really high, if you do an IPO there’s no one else.
  • If you do an IPO actually I mean I can show you a list and checklist and all sorts of things but you have many experts at your side.
  • It starts with the lead bank and then this is the one you start talking long before you do an IPO.
  • It’s imperative, you need the bank to coordinate the IPO, support the process, do the road show and so on.
  • So selecting the right lead bank is really important and you can look at some stats who’s doing how many IPO’s and the probability that they have potential buyers who will also buy your shares is very, very high.
  • What you definitely need is a third group, you need tax consultants, it could be complex especially if you go for an IPO in a different country.
  • You always need some lawyers around that because IPO rules are complex and you probably need people who take you through that process by doing the road show with you and all sorts of things.
  • So keep the one thing in mind and we are still doing the venture capital investment, IPO is an interesting exit route for a company which is able to be big enough for that, which has a equity story and still will have an equity story.
  • It’s especially interesting because you fully remain on board and it’s a good probability for your old shareholders, for the VC to sell the shares after the IPO or say at least six months after the IPO.
  • Especially it’s very costly and remember 2008, people started to prepare their IPO’s, financial crisis came and they were not able to do that for the next one, two, three years.

Week 6: Post-Investment Phase – From Involvement to Exit > Exit Routes – The Buyout > Exit Routes – The Buyout

  • Again, we are just in a VC financing round and we’re not doing the exit so if you want to learn more about a buyout there are many, many books and all sorts of things but let’s give you a little example what that means and how you might be able to use it as an entrepreneur.
  • That could be the case because investors fund ends and the entrepreneurs say “Ok, we can’t make an exit or the exit only will be promising in two, three years because the time is not right right now” but it gives you the opportunity to be bought out.
  • It is not an easy structure and the question is always is the management able to do that? Because if you have an equity story, you have some value of the company and the VC has a share of that, how are you able to bring all that money to the other shareholder? In most cases entrepreneurs don’t have it.
  • The goal then is to have a return for the new private equity investor and the management still plays a role, the entrepreneurs play a role but they have a new role within the whole financial structure of the deal.
  • Entrepreneurial again means you try to buy the VC’s out of your investor and buy back a 100% of the ownership.
  • As I said before, some financial investors, some new pays out the former investors and is newly on board which also means by the way you have to do the next exit or you have to think about the next exit mechanism because this financial investor, equity investor wants to leave your company too.
  • So there you can see it’s an easy chart but in most cases it’s a lot more complex than what you can see on the chart because normally the founders are involved too and the employees are involved, maybe one of the founders wants to leave the company but some of the management wants to be in and then it gets to the financial structuring and it’s mostly driven by the financial investor and these investors, they have the patterns of how to structure the deal financially in order that makes sense for them and so on, so that gets more difficult.
  • It happens, in some cases entrepreneurs are able to use that structure, to buy out investors when the fund ends but in most cases no one is really able to pay for the shares on the one hand and in other cases the company is not really ready for some new investor with a high leverage to come in.
  • This is why buyout cases are more common for like midsize firms and larger companies or large private equity funds do their deals and try to realize their value creation, like try to realize what they have as a business model.

Week 6: Post-Investment Phase – From Involvement to Exit > Summary and Conclusion > Summary and Conclusion

  • You know what to expect from a VC, you remember Vinod Khosla, really value creation or not? But also when is the right timing to have VC money? Because VC’s wanna make big deals, they don’t wanna help you in your understanding, maybe business angels will help you in understanding, VC’s help you in scaling, so that was the issue there, so that was the first one, the second one and the issue in scaling, what do you expect? But also the other way around, what does a VC expect from you? What will he look for, how does he select potential companies? And we gave you an idea about that, so you’re perfectly ready to go in the process if you are able to do that.
  • Last but not least, when it came to an investment and you’re working with a VC, what’s an equity story in general and and how does a VC think about exit, exiting and yeah that’s it what I was able to contribute.
  • It’s about the people, the people on your side, is the CFO ready for that, are you also as a CEO are you ready for that? And it’s about the people on the other side, who are you dealing with and how can you do the negotiations then? So that’s a nice structure in order to have some kind of like checklist if you also use the points underneath the papers, people and process, so the 3P-Framework helps you to get all what we done into some line.
  • We have other courses coming up and you were able to see it, there is many, many more topics we can discuss and thanks for joining me in this course and hope to see you again, thank you very much.

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