According to the Bureau of Labour Statistics, around 20% of new businesses fail within their first year. 30% of small businesses fail in their second year, and 50% of these businesses fail in the first five years. The data also shows that only 25% make it to 15 years or more.
When analysing the reason behind these numbers, the report found that 19% of startups fail because of too much competition, and another 18% fail because of pricing or cost issues.
Succeeding as a startup has its challenges. There’s a lot of uncertainty when starting up a new business and often it can be difficult to project growth, revenue and success. When a startup has raised capital, is at a profitable stage and provides a solution to a market, the road ahead can be much clearer.
Last month, we teamed up with Moore Kingston Smith to put together a panel debate on how startups can get the most desirable results from an exit. Here, we uncover the main key takeaways from our panel debate with Moore Kingston Smith.
Edel Coen, Investment Associate, Draper Esprit
Ivo Weevers – CEO, Albert
Paul Winterflood, Corporate Finance Director, Moore Kingston Smith
Lee Williams, Director, Luxseekers
Strengthen your network
Different exits take more time to implement and require different processes, so a startup founder can never be sure where or when they might meet a potential partner for their business.
Ivo Weevers explains: “We didn’t have a specific strategy due to the reason that the buyer expressed interest in us.
“However, any investment or acquisition with a partner is created because you have a partnership with them. This relationship is built over time, and that’s definitely the case with our journey.
“We met Santander in our first year and stayed in touch, and our initial discussions began as potential collaboration talks. We were then able to switch it to an acquisition talk. The most important thing is to create connections and build relationships in the industry.”
Lee Williams adds: “Getting in people’s radar is key. As a founder your startup is your crown jewel, and you don’t want to miss out by not building strong relationships within your industry.”
Do your due diligence
Ivo Weevers advises to sort out all your logistics, especially GDPR. “Really sort out your GDPR. It will de-risk your acquisition for the buyer.”
Paul Winterflood adds: “It’s never too early to start preparing for due diligence, especially in the tech space, as you never know when an acquisition or exit will come around so it is important to get into good habits and processes early in case an exit opportunity does come out of the blue.
He continues: “One of the most frustrating aspects for us is when a company is approached for a sale but they haven’t put the building blocks in place for the process so information is poor or unavailable. Make sure you implement the best practice methodologies, ensure your staff are incentivised to build value in your business so you don’t have to scramble around immediately prior to an exit because ultimately that’s how you lose value through the process.”
Remain focused and flexible
Will every tech exit have a happy ending? Not always. “Always have a backup buyer. The first frog you kiss won’t always be a Prince.” says digital investor Lee Williams.
Paul Winterflood adds: “Planning a successful exit strategy is to remain focused but be flexible. Exiting is a fluid process.”
Understand your target buyer
Edel Coen from Draper Esprit says: What’s important from a VC standpoint during the first initial years of a startup is understanding who the universe of target buyers are. Sometimes these can be a strategic tech exit in the hundreds of millions, but it can also be a smaller target client.
“It’s more about understanding where the company is positioned in terms of a potential exit.”
Lee Williams adds: “Think about the buyer and why they’re investing in your business. Of course, it’s about your technology and team, but ultimately it’s also your revenue and market potential. You’re showing the consistency of customers and revenue and future cash flow, and that’s where you want to be.
“There are startups with poor contracts and no real evidence, which makes it difficult for clients to understand how your product is going to make a difference. There’s a lot of work needed around the due diligence to be prepared for the real hard questions that are going to come.”
Paul Winterflood explains that from a process perspective, the one thing that’s critical is momentum.
“When companies don’t have reliable and accurate up to date information is when the acquirers will lose interest. If it takes months to produce financial information then it doesn’t benefit your business’ standpoint.
Winterflood continues: “If you’ve got a prospective buyer and a good proposition, it’s important to build on this momentum. Buyers are only human, they lose interest, so ensure they can’t with a spot on proposition and readily available information.”
Albert, the fintech book-keeping app, was acquired by Santander within only four years of trading. Weevers explains: “For us, exiting was never a short term initiative. We were in the game for building a really good product. The fact that it came so early was a surprise as we were only focused on raising a Series A round, but when the opportunity comes around, and believe me these opportunities are very rare, it was a game charger.”
Edel Coen adds: “Think about why a company is interested in acquiring your startup. Is it for your technology, your deep IP that’s been built up, or are they acquiring your business for the revenue, customers and potential market share, or even the co-founders and the team. If you can figure this aspect out, really nail that in your pitch to ensure everything is lined up. Think about why you’re desirable and play on that.”
If you would like to discuss possible exit routes, please get in touch with Moore Kingston Smith’s corporate finance team.