Transcript No Slide Title

Commercialisation
and Exit Strategies
Trade Sale Exit Ready
Index
Copyright 2003 T. McKaskill
Proactive Innovation Strategies
Strategy without tactics is the slowest route to victory.
Tactics without strategy is the noise before defeat.
The general who wins the battle makes many calculations
before the battle is fought. The General who loses makes
but few calculations before-hand.
Sun Tzu
Hope is not a strategy.
M. Henos
Exit strategy planning is about making choices about how
you achieve the exit not just following a procedure, a
list of actions, or a series of steps.
Stuff Happens
• You cant control everything
• Major customer goes bust (HIH, Ansett, Enron)
• Economic or environmental disaster (Asian
meltdown, Sept 11th, depression)
• Your sector changes through M&A or new major
competitor
• You get sued (public liability, patent infringement)
• Someone files a patent before you
• Strategies need resilience and must provide
successful outcomes in poor conditions
Why Exit
• Liquidity means you have real worth - ownership
without liquidity is a liability
• Investors need to see an exit path - venture capitalist
will not do a deal without a clear exit within 3 - 5
years
• You need to get a return on your risk beyond a salary
• Recruitment of star staff may be difficult/impossible
without the upside of a exit
Building an Exit Strategy
• The ‘end game’ of commercialisation is an exit via a
trade sale or a public listing
• Firms that are successful have similar attributes at
each stage in the exit process
• These attributes provide the basis for establishing
the quality of an exit strategy
• Each attribute can then be measured and an
improvement plan devised
Innovation Indices
Trade Sale
Ready Index Trade
Sale
Commercialisation
Ready Index
IP
IP Ready
Index
Spinout
IPO Ready
Index
IPO
Innovation Indices
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Defines attributes of successful outcomes
Measures progress in meeting each attribute
Provides an overall Index Score of Readiness
Identifies where additional work is needed
Can be used for investment selection, progress
monitoring and progress funding
• Can be used to educate, guide consulting activity and
provide a platform to build a strategy
IP Selection
• Not all IP has the potential to justify the costs of
commercialisation
• To exit successfully you have to be able to isolate and
sell the IP (without the inventor)
• But you need the inventor and the institution to
aggressively develop IP specifically for a spin out
• Then you need significant institutional support
• The IP Ready Index identifies those attributes of
science that are most likely to be present in successful
commercialisation projects
Commercialisation Strategy
• A spin out is a waste of time unless it can exit
successfully
• Once you have identified the science, you have to
create a spin out vehicle
• There must be an alignment of interests between
inventors, the institution, investors and managers
• Skills and experience in entrepreneurial activity
must be present, not just in science
• The Commercialise Ready Index identifies those
attributes that are most likely to be present in
successful spin outs
Trade Sale Exit
• Very few firms can achieve an IPO
• More than 90% of exits are trade sales
• A successful trade sale identifies buyers who have a
strategic fit with the IP
• The buyer has specific requirements for the IP, the
people and the business
• It may not be revenue, profit or customers that are
important – this may not be the same as an IPO
strategy
• The Trade Sale Ready Index identifies those
attributes that have been shown to achieve the best
trade sale outcomes
IPO Strategy
• The IPO is the first step in a funding strategy
• The market wants and needs a strong after market
• Successful public listing requires proven sales, profits
and an experienced management team
• Successful after market requires sustainable and
resilient multiple revenue streams in global markets
• In a normal market good strong firms can always
raise funds
• The IPO Ready Index identifies those attributes that
have been shown to create the best after market
outcomes
The Trade Sale Process
Building Exit Readiness
Why Sell
• Stuff happens
• Sometimes you need a break, less stress, security
• “Take the money” – it is better in your bank than
theirs
• Entrepreneurs can do it over and over again
• You owe it to the other investors to give them a
return on their money and effort
• You may make more money with the buyer
• Successful exits are rare – you are a winner
• Next time you can use other people’s money
Australian Venture Capital Exit
Performance
Trade Sale
Start Up
IPO
Back Door
Listing
Only 2% of firms
screened get
VC funding
31%
Number
$
21%
Angel/Seed
11%
32%
Early Stage
27%
Write Off
29%
Development
/Expansion
33%
5%
Late Stage
7%
Trade Sale
Based on Golis 2002
Failure/
Life Style
Harvest
31%
(in 2000 only 1% of
funds under management)
IPO
Back Door
Listing
12%
Other
Exits
26%
Doing the Deal
• Simply a balance of risk and reward
• Understand how to identify and increase the
strategic fit and the value to the buyer
• Identify and reduce risks to the buyer
• Be prepared for the negotiation
• Understand the impact on your company and on the
buyer’s of the acquisition
• Make it easy for them to say ‘Yes’
• Have as few non-negotiable items as possible
Trade Sale Exit Readiness
• Alignment
– Directors, shareholders, key employees all agree
– Personal objectives can be met in a trade sale
– Realistic expectations of post sale roles
• Governance and Due Diligence
– Due diligence ready
– Clean accounts, contracts, IP, relationships
• Strategy
– Create competitive tension
Alignment
• Objectives, expectations and aspirations need to be
exposed and discussed
• A clear exit objective makes the planning easier
• A trade sale strategy is not the same as an IPO
strategy, you need to get an agreement on that
• Not everyone will have a future in the firm – who
goes and who stays needs to be considered
• You can’t execute a strategy if people are going in
different directions
• A disagreement can kill a sale
Ambiguities
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Unclear ownership of IP
Outstanding customer obligations not documented
Reasons for successes and/or failures not understood
Intentions of key employees not known
Future roles of senior executives not defined
No clear development path for products
No well articulated vision
Governance
• Show that the firm is efficiently, effectively and
properly managed
• Good systems are in place for reporting, contracting,
HR, and health and safety
• Use creditable and knowledgeable accountants and
lawyers
• IP is well documented and protected
• Employment salaries and conditions and are
industry standard
• Show that risks are minimised
Acquisition Risks
• What baggage are you carrying
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Possible redundancies
Old products
Loss making activities
Poor infrastructure
Outstanding customer litigation
Unfulfilled obligations
Burdensome management contracts, shareholder
agreements, option schemes, employee benefit entitlements
• Anything that has to be cleaned up will kill the deal
or reduce the value
Attractive
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Value is in the eye of the beholder
It is not about you – only about them
Purchasers looks at opportunities and risks
Can you articulate why they should buy
Can you walk in their shoes - what makes it a good
deal from their side of the table
• Can you anticipate problems in doing the deal and
reduce or remove them in advance
• How can you make it work for them
Things That Reduce Value
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Time based not product
Tied to culture, geography, legislation
Highly dependant on key people
Knowledge personal not codified
Tied to key customer
High switching costs (underlying supplier)
Location (difficult to leverage)
Finding A Buyer
Competitors
Customers
Children
Directors
Firm
Alliances
Advisors
Employees
Managers
Partners
New Entrants
Suppliers
Look For Strategic Fit
• What is your potential
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Low penetration into market (resource bound)
Underlying technology with further applications
Customers with additional requirements
Replication into other geographical markets
Constraints which can be overcome (finance, people, skills)
Scalability
Additional business models (rental, internet, JV’s)
• What is their potential
• How would they use what you have
Internal Sale or Transfer
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Sell to employees
Sell to management team
Sell to existing investors
Pass control to children
Sell to external Directors
May have to wait for the money
May continue at risk
May need to continue with guarantees
Sell To A Customer
• Customer may get control over an area of risk (you
might go out of business or sell to a competitor)
• Customer may want to deny service to competitors
• May want a dedicated effort - e.g. to complete a
major project
• They may want to on-sell to their customers
• They may want to move the business in a direction
you are not interested in
Sell To A Supplier
• They may have income at risk (you might go out of
business or decide to go to another supplier)
• They may have other customers for you
• It could be a diversification strategy
• You may be able to leverage their other products into
your customers
• You may be the door opener for them
• Economies from underlying technologies
Sell To An Alliance Partner
• They may want to get control over the marketing and
sales process
• They may want your share of the cake
• You might be able to go to another partner
• They may wish to deny their competitors from
working with you
• You might not be going tin the direction that best
supports their market strategy
• They may be able to expand your business
Sell to a Competitor
• Could be to take you out of the market
• They may want access to technology, customers,
personnel, product
• They may want access to geography
• Competition may be reducing prices and/or
increasing costs
• They may want to achieve critical mass
Sell To A New Entrant
• You might have domain expertise they need
• You might have customer base they want to
penetrate
• It may be cheapest and/or quickest way of entering
an established or emerging market
• They may want to shift their center of operations to a
new market
• You may have domestic expertise of appeal to a
foreign entrant
Sell To A Conglomerate
• Some companies are financially engineered where
economies of scale in raising capital are their
competitive advantage
• It may spread their risks across another market
• They may already have investments within the same
market but at different product positions
• They may have common resources which can be
leveraged
Competitive Tension
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Prepare to be exit ready
Agree who can negotiate and let them do the deal
Develop multiple potential acquirers
Build ‘strategic fit’ for acquirers
Have enough cash to avoid a fire sale
Have an alternative exit path (eg. IPO)
Keep the deal simple – make it easy to do the deal –
reduce the number of non-negotiable items
Trade Sale Timing
There are three times to sell: Early
Late, and
Exactly at the right time.
Selling at the right time, all the time, is
intellectually impossible. Selling too late
is foolish. That leaves selling early.
Nick Ferguson, Chairman, Schroeder Venture Holdings
Never Stop Selling
• Plan to sell from day one
• Always be prepared for the discussion
• Keep the books clean, watch out for litigation and for
contingent liabilities (they kill deals)
• Things change - not always for the best
• You only have a piece of paper (stock certificates)
until you see cash - it is not worth anything
• Money in the bank is a great comfort
Be Prepared
• Have a good set of lawyers and accountants - let
them know your intention
• Don’t compromise on contracts
• Share the wealth - then everyone is motivated and
will support the sale
• Understand what the valuation models are based on
(products, customers, brand, recurring revenue etc)
• Wine and dine potential buyers
Have An Exit Game Plan
• What are your personal goals
• If you stay - you are no longer the Boss - what can
you contribute
• Be prepared for all the top executives to go
• Make sure you are not irreplaceable
• Have a good idea of where the synergy is and have an
outline plan to show how it works
• Understand what your shareholders want from the
deal (cash, shares, jobs etc)
Proactive Exit Planning
• Not all exits have the same requirements
• Several different strategies for each exit are available
• You might limit your chances of a successful exit by
closing off options through lack of forward planning
• Start with the ‘end game’ and work backwards
• You can plan for more than one exit path (IPO, trade
sale, back door listing, MBO/LBO)
• Everyone can win
Why Use The Indices
• The Indices measure the ‘risk’ associated with a
strategy.
• They emphasise resilience and capacity to weather
change and unforseen events
• Being ‘Ready’ is the key to VC finance and access to
the best advisors
• They provide a strategy map of best practice
• You know where you are and what you need to do to
execute successfully
• They dramatically increase the probability of success
How to Use the Indices
• Looks simple, just a set of questions
• Each question is based on years of experience and
has been fine tuned through validation
• Scoring is complex and requires training to be useful
and consistent
• Each item is weighted to provide the best overall
result
• Considerable experience is needed to develop the
forward strategy
• Strategies must be adapted to individual
circumstances (not one size fits all)
Index Advantages
• Strategy advice currently is unstructured,
inconsistent and biased towards personal experience
• The Indices ensure a systematic and comprehensive
coverage of risk areas
• Indices are independent, objective measures – takes
the guesswork and emotion out of an evaluation
• Provides a scientifically based measure of progress –
will achieve credibility in the scientific community
• May be used for assessment, progress monitoring,
strategy development or progress funding
Index Validation
• Initial Indices have been developed in conjunction
with a small number of practicing professional
advisors and operating executives
• Additional validation has been undertaken by
circulation to a wide list of interested parties
• Content has been validated with available literature
• Now requires validation on historical data (successes
and failures in each category)
• Next, validation through a longitudinal study in each
area