For many tech startup and scaleup founders, the ultimate goal is to exit – selling their company for vast sums of money. This article, co-authored by Simon Pearson, Anna Faelten and Jonny Chiles from EY’s TMT Corporate Finance team, explores how you can figure out if you are prepared for exit.
For Uber’s ninth anniversary, co-founder Garrett Camp shared the company’s first pitch deck via Medium. “UberCab” (“Cab” was dropped from the name in 2010) promised a one-click, members-only car service that catered to entrepreneurial residents of San Francisco’s Bay Area. Nine years and a new CEO later the company has transformed the logistical architecture of many major cities and successfully raised over $9bn.
The presentation offers a rare insight into how Uber positioned itself to early investors. Within the first four slides Uber outlined the core problem with the existing taxi ecosystem (the use of ageing and inefficient technology) and positioned itself as an on demand car service empowered by the mobile phone. The core message was that the underlying technology deployed by Uber would drive improvements in service. In other words, Uber chose to position itself as a technology company first, and a taxi company second, articulating an investment narrative that resonated with the Venture Capitalists (VCs) of Silicon Valley.
Defining the strategic objective
Following on from our previous post on exit strategies, the strategic positioning of your business to VCs, Private Equity (PE) or trade acquirers is a critical step on the route to maximising shareholder value in an exit process.
At its core, strategic positioning is an extension of your company’s mission statement. In the space of a few sentences the mission statement should succinctly define the problem being addressed and why your solution is compelling. In the case of Uber, this evolved to become “Transportation as reliable as running water, everywhere for everyone”.
- The objective is to create a memorable “soundbite” that an investor or acquirer will obsess over long after the initial meeting or pitch.
- What makes your company unique? The statement should make your company stand out from the variety of capital deployment options available to an investor.
Your company’s mission statement takes on increasing importance as you prepare for an exit, with your investment narrative aligning around this raison d’etre. The objective of strategic positioning is to expand and support this statement, carefully aligning it with the acquirer’s investment thesis.
Positioning your business
Potential acquirers will, of course, approach your business with different motives. Each will have a unique lens through which they evaluate your company. Understanding what they see as valuable can be key to driving up the final sale price at exit.
To demonstrate this point it’s worth considering what motivates a trade acquirer to pursue M&A and how this would differ from a financial investor. To a trade buyer, your company might be an attractive acquisition target because it provides them with access to new services, customers or technology that were previously lacking. The perspective of a VC or PE investor will invariably be different. Amongst other factors, their focus will be on growth, the total addressable market (TAM) and the route to achieving an abnormal return on their investment.
Each acquirer will focus on different metrics and will therefore have their own view on valuation. The strategic positioning of your business should be tailored accordingly. By putting yourself in the shoes of the people on the other side and being strategic with the data points that you choose to focus on you can add incremental value to your business in the eyes of an investor.
- Thinking about the press release that an acquirer will make at completion can be a helpful framing tool; being able to write it in advance is normally a positive sign!
- How can you expand the mission statement into three-to-five supporting assertions with clear, evidenced based points?
Selecting the right KPIs
Technology has empowered businesses to collect large quantities of operational and financial data with which to analyse performance. Key performance indicators (KPIs) are traditionally used as a management tool to identify areas of the company that require attention; the classic Peter Drucker adage is that “what gets measured gets improved”. While this often holds true, KPIs also have a more subtle role to play in positioning your business for an exit.
- KPIs are inherently unique to your company’s business model and stage of development.
- What KPIs do you want to draw attention to and stand-out as exceptional? Are traditional metrics like profitability the best way to evaluate business performance?
KPIs can be selectively used to construct an investment narrative that is tailored to the potential acquirer or investor. For instance, when positioning your business for a trade acquisition you may choose to focus on sales performance or customer synergies. Alternatively, for a VC the emphasis might shift to the metrics underpinning growth (eg daily active users).
For entrepreneurs, understanding the value in collecting KPI information is an important first step. Starting to track a range of KPIs early in the company’s lifecycle provides optionality at the point of exit. It enables you to underpin your equity story with evidence, allowing you to control the narrative.
Strategic positioning can be acutely difficult for entrepreneurs with limited transaction experience or awareness of different buyer groups. At the point of exit founders have typically (and correctly) been focused on building and scaling their business. Therefore the role of positioning the company externally often falls to an advisor. Here transaction experience and an intimate knowledge of key parties can be invaluable in selecting the right KPIs to present. Helping founders to construct a narrative that aligns with the acquirer’s investment thesis forms part of the advisor’s value proposition and can be instrumental in achieving a positive outcome for shareholders.