Kiwi cloud computing company GreenButton certainly managed to do it right – the Kiwi firm’s 2014 acquisition by software giant Microsoft is now the stuff of legend.
Dan Khan, tech entrepreneur, investor and former director of tech accelerator, Lightning Lab, has done a study of GreenButton’s story and is currently on the road presenting two papers – Anatomy of a Successful Exit: The GreenButton story and Reflections on a Successful Exit: A Post-Post-Mortem of the GreenButton Story – in a series of road shows up and down the country.
Idealog managed to catch up with him this morning to talk about the real reason angels invest, the trouble with raising VC in the states and the importance of focusing on your exit first.
Idealog: Hi Dan. First things first. When we talk about ‘exit strategies’, what are we actually talking about?
Khan: Well there are three primary ways of exiting a business: You can list on the stock exchange – that is the IPO route, the Rod Drury route; if you’ve got predictable cash generating capability there’s the option to sell out in an acquisition – that’s a financial exit; then there’s the third way, which we see a little more often in the start-up world, where people are buying a company for the technology – that’s the strategic exit.
Got it. Okay, so how do you know when it’s time to exit? How soon is too soon?
That’s a good question. The fact is that, for the most part, people aren’t building companies to sell them at all. But if you’re building a company that takes external investment, those investors are investing specifically to see a return, so they'll often bring pressure to get some exit plan in place down the line. That’s the unwritten expectation.
Often however the exit isn’t about money at all. For example, sometimes selling the company is a way for you achieve the scale you’ve been looking for. Take GreenButton for example. Microsoft bought them for the technology, and GreenButton achieved their scale. It was about trying to build that capability to scale.
You’ve talked a bit about ‘early exit focus’. What is it exactly, and why is it important to exit success?
A lot of the entrepreneurs I talk to have got this dream in their head to sell out big, make some money and have that financial freedom. That’s understandable, but it’s not always realistic. If you look through GreenButton’s journey, it’s clear that the exit for those guys didn’t happen by accident. Entrepreneurs often think ‘I’ll just focus on building my company and then the company will be bought as if by accident’. But usually it’s not an accident. It’s a bunch of work. Thinking about it from day one, you can build that roadmap and get there a lot easier.
So does that early-day focus affect what kind of investors are bought on-board? Is there a symbiotic relationship between early investment and future acquisition?
Yes and no. You want to be selective about what investors you bring in anyway. You don’t just want money, you want smart money – money with networks and expertise as well. That can make a difference of millions.
When it comes to raising venture capital, many start-ups assume the US is going to be their best bet. Is that commonly the case?
A lot of the companies I see naively think the US is going to be there as the default route. That's understandable. The big deals that happen there get glamourized by the tech press – every other day someone raises a couple of million dollars, so that becomes the expectation. The idea is ‘I’ll create a bit of seed funding here, and in year or two I’ll be in the US raising real money. With the GreenButton example, they went up and down that Sand Hill Road so many times, and got so many knockbacks. It just isn’t as easy as everyone says. Not that many New Zealand companies have been successful raising money in the US.
And I do the same thing – I look at these funding announcements on TechCrunch and I think, well that must be easy, but it just isn’t.
From an investment point of view, you’ve said “true angel investment isn’t just about money and seeing a return”. What’s it about then?
Well first off, it is definitely about money. Generally I’m looking to invest because I think there’s a return. But it’s pretty clear that it’s about more than that. I think it’s about wanting to be close to something that excites you. Angel investment is a way to get close to that excitement. There’s an opportunity to grow leaders in the community, and it’s just believing in someone and wanting to see them be successful. It’s about the money too, of course, but most angel investors want to give you more than money, they want to give you that support, and give you that mentoring. There’s a bit of ego in it too, I think.
Forgive my ignorance, but how is value established? How are prices settled on?
It’s a bit like selling a house. It’s what the buyer thinks it’s worth. That’s the art and there’s no science to it. Having said that, it helps to have some competitive tension there too. You don’t what to negotiate with only one buyer. There are a lot of benchmarks, but a lot more of it is perception.
Speaking of competitive tension, it’s not really a case of dealing with anybody who happens to throw a number on the table is it? What kind of due diligence is required when it comes to vetoing who you’re going to have discussions with?
It’s hard to say, because you’ve got to entertain a bunch of prospects in your pipeline, but you’ve also got to balance that with how much work it takes to deal with them. You might be being approached for acquisition by Amazon, but you can get blinded by a big name company, so you need to understand their acquisition history and be careful about the amount of work you do around it. Of course just because they haven’t acquired anyone before doesn’t mean they won’t, but you’re trying to reduce the risk [of wasting years] on people who will maybe buy you. You have to entertain these things, but you need to do that due diligence and not get blinded by an offer of big money.
I imagine that the whole process from start-up to exit can be quite an emotional journey, right?
Oh absolutely. There’s a lot on the line. There’s reputation, there’s money, there’s other people you’ve bought with you, so it’s always going to be emotional. It really is like a rollercoaster at all points. It’s like having children – eventually you’ve got to set them free, so yeah, it certainly is emotional.
But that’s the fun of it. That’s why people do it.