I attended some of the sessions on Wednesday for Toronto Tech Week, here are my notes from Albert Behr’s session on exit strategies:
“If you don’t know where you are going, you might not get there”. Was the headline advice at the “Designing for Liquidity” startup day event of Toronto Tech Week. Kudos to the organizers for pulling together some great startup content, the day was a great warmup for startupempire soon to come.
The Liquidity event panel had good stuff from Tim Lee of Gowlings on the legal side of selling your company (hint: you’ll need a lawyer), Tim Lee of GrowthWorks on the VC perspective (yes virginia, there still is VC activity in Canada, just as much as pre-bubble …but… to fewer companies and you can forget about early stage, how you raise your first 0-4M is your problem, learn to love angels, government handouts and your bootstraps). But the real barn burning presentation was Albert Behr on how to get from zero to sold in three years. Here’s my hasty notes:
First off: the IPO is dead. SOX killed the IPO, so did the bubble. There’s only two ways to a happy ending these days, keep running your company into the sunset or get bought out.
Tech is still a great market. 3 Trillion a year. But here’s the challenge. We’re 30 years into the industry and it’s now an oligopoly. Doesn’t matter what tech you build there are only, maybe 30 players out there that matter that are your exit strategy for acquisition. And the list is getting smaller, the list of companies on the Nasdaq is down 25%.
And the tech cycles are getting faster. You are only hot when you are hot, you will never be hot again. There’s only one company in the history of tech that has been hot twice, and that’s Apple. You are not Apple. You have maybe 3 years, or 30-36 months to make it. So build a 3 year business plan and get the hell out there. Forget 5 year plans.
Here’s the strategy. Choose you 2-3 likeliest suitors and and “antagonize” the hell out of them until they buy you.
But remember we are Canadian we have to play to our strengths. Everyone makes the same mistake and tries to sell direct. Canada is great at producing engineers, we are not good at scaling. Do not go toe to toe with direct sales forces of your American competitors, they will have 3 times as much money, they will blow you out of the water (anecdote, one time I raised 27M, a lot of money for a canadian company right? Wrong, my one competitor raised 90M, the other 140M. I had one sales guy in NYC, they had 14. Don’t take the market head on.
Instead, build your channels, license your technology, go the OEM route. Don’t worry about margins 100% margins of nothing is still nothing. All that matters is footprint, getting your stuff distributed. You’ve got only 30months to get your product on to every “Walmart shelf” [insert top three distribution channels for your industry here].
So first, lock down your IP. This is very important. Provisional file everything, it’s not free but it’s not that expensive either. Provisional filings are cheap, do it in Canada, the US and Europe. In Albert’s companies he gives the CTO’s quota’s of 1-2 IP filings a quarter.
Canada is good for starting out, build your first 0.5M in revenue here, not to prove that the distribution works, but that the technology works. The dogs will eat the dog food. That the product/beta is ready. Then look south, focus on (only) the US and western parts of Europe. You need the distribution deals here to drive you to the 5-10M revenues where you start to become interesting to acquisitors.
Tightly integrate your stuff with 2-3 existing players, both technically and businesswise. Create the app that gives blackberry an edge over iphone, give microsoft an edge over IBM etc.
Then go to the big guys with a deal. Don’t be a Canadian wimp, use linkedin and go straight to the general manager or VP in charge. In the US they do deals, if you have something that might grow their business, they will give you 10 minutes of their time. White label your technology, let them slap their brand on it. (Only after you’ve locked down the IP). Make it a product that brings them incremental sales, and or a competitive edge.
Use exclusivity deals, but tie it to revenue targets and make it time limited so they have incentive to move it and you get your product back if they don’t.
Then, this is how you antagonize them. They’ve now outsourced engineering to you by proxy. As the sales grow and they keep having to pay royalties, they will see where this is going and you’ll drive their CFO crazy. The company will come to you to buy you out. Sell at 4x revenue multiple and move on, next company…