John Huston led a session at the 2014 ACA conference (www.angelcapitalassociation.org/2014summit/) in Washington, DC, on “Driving Lucrative Investments from the Board room”. His focus on exit strategy was clear and loud.
John, ex-Chairman of the Angel Capital Association & the Angel Resource Institute, is quite literally a walking wikipedia of Angel intel and an energetic presenter. He founded his Angel investment group, Ohio TechAngels, in 2004 after retiring from a 30 year banking career and is currently investing out of their third fund focused solely on Ohio-based technology start-ups. At 282 members it is one of the largest groups in North America.
We will be welcoming John Huston to New Zealand in October 2014 at the #AANZ Summit14 at Orakei Bay, Auckland. Register for the Summit today to hear from John in person, places are limited so be quick.
John started his ACA 2014 presentation advising “great exits start with exit-goal congruence, and therefore it is important to give founders the heads up this is where you are heading from the get go. You are both going to be building financial and entrepreneurial wealth.”
“Your message regarding exit-strategy to founders: if you want $3-5m in your pocket in about 5 years and you’ll be working 80 hour weeks. Minimum wage!”
As their angel investor you want them to see their baby grow up and be successful.
He then asked the question Angels should all ask themselves: Are you growing your “ABC” (angel backed company) to attract financial or strategic buyers? Financial exits which are 6-8x and based on ebita take too long. This is NOT what you are after. Strategic exits is about building real value.
Are VCs required for the exit? He had no good or bad answer. But noted that VC’s goals are rarely aligned with angels. They are required to balance their duty to LPs against ABC shareholders and will generally want all ABC directors off the board. And always ask is the VC director you are getting the one that PERSONALLY drove the last exit. Chances are he didn’t. VC’s are motivated by raising the next fund… and what metrics they need to demonstrate to do this.
Publicly owned companies also have very different goals from an ABC. Maxing shareholder value etc not selling the company. Share performance vs sector performance etc, ie: not big multiples.
Angels buy and sell our shares at a negotiated price and do the following:
- Raise follow on rounds
- Help recruit team
- Replace CEO
- Build strategic value
- Drive lucrative exits (which are NOT the same as ‘quick flip’ strategies)
Other gems of Angel wisdom from John included:
Dilution kills you. So be as capital efficient as possible.
Angel Investor directors need tools training and aligned expectations.
Build a capital access plan. If you need VCs you are adding another layer of risk. You will have to increase the price and value enormously to outweigh the dilution.
Know the difference between an IRR and multiples.
Take an inventory – your strategic assets (what you own) and capability (what you do).
Identify potential acquirers. Prioritize a maximum of 5 identified by their ability to pay $50m for the company and their willingness to bid. Then work on their willingness. Can you sell anything to them and then identify the customers that will impress them? Not every customer will have the same value to the acquirer.
Track TSB (targeted strategic buyer) and attract their attention.
Engage a banker. If needed.
Have all directors take more of a role in the sale of the business so that CEO can keep driving the sales.
Alternative strategy is “build a great company and they will come!” which is not an exit strategy that has any more chance of success than build a great product and they will come.
John concluded with a bunch of questions Ohio Tech Angels have identified to ask founders, with number one on the list being the need for them to answer: Why would an acquirer want to buy your company?
– Suse Reynolds, from Washington, DC, USA