Where exits go wrong

image The way that a lot of VC backed companies go about selling themselves has been bugging me for three or four years now and the reasons why came into sharp relief for me as we reviewed the sixty odd companies in our portfolio over the Thursday and Friday of last week.

Before I get to the main point of this post and highlight some common mistakes that get made I want to set the scene by saying here at DFJ Esprit we think of ourselves as being pretty good at realising value for our companies via M&A.  Data is difficult to come by but by our estimates we account for around 10% of VC backed exits over $35m since 2004 – which we believe is more than any other active European VC – and a few of those deals enjoyed some pretty special prices as well.  We are also pretty busy on this front right now with three of our portfolio in exit discussions that could close imminently (and my best guess is that two of them will).

However, post the acquisition of the 3i portfolio last summer we need to up our game further, and we have been doing a lot of thinking about what we can do better.  These are my four main takeaways.

  1. Don’t launch a process too early – it is an old VC cliche that companies are bought not sold, and you are almost certainly not going to maximise value by launching a process before you know that there is definite interest, ideally from two or more suitors.
  2. Make sure the pitch is grounded in reality – getting the best price is all about selling a big story, but if there is a disconnect between with what is actually happening in the business today buyers will usually see it.
  3. Being great at running a company isn’t the same as being great at selling it – we have known many CEOs who are great at growing and running their companies but don’t excel at mapping their company’s story into a big organisation and getting potential acquirers really excited.
  4. Be realistic with valuation expectations – I have seen literally tens of millions of value destroyed by companies with value expectations in excess of what the market will pay.  Processes are often launched at the optimum moment for a company to sell and then fail when potential acquirers are told the asking price.  The following year the company is hit with the double whammy of being less hot an of having tried and failed to sell itself.

I might upset some friends with this next comment, but these mistakes often get made because VCs, angels and founders are optimistic by nature, want to believe in their companies and then buy into the stories peddled by their corporate finance advisers.  I am not for a moment suggesting that there is dishonesty at play here, but it is critical to understand how the dynamics between management, shareholders and bankers can quickly lead to inflated expectations of both price and timing and then the other issues listed above.

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