“What’s the exit strategy?” Page 4 in the Venture Capital handbook. Page 6 in Private Equity Investing for Dummies.
I dare you to answer “Not only don’t I know, but I don’t particularly care either.” Don’t expect to get funded.
Which, come to think of it, leaves me a bit concerned. I wonder if my investors are reading this blog. This entry could be a bit of a problem if they are.
Warren Buffett says: “If you don’t feel comfortable owning something for 10 years, then don’t own it for 10 minutes.”
The Bear pipes in: “Getting Bailed out is No Exit Strategy.”
Mark Cuban chuckles: “Getting bailed out worked pretty darn well for me.” Cuban, the eccentric and free-wheeling owner of the Dallas Mavericks, sold his Broadcast.com start-up to Yahoo in 1999 for $5.7B. http://www.internetnews.com/bus-news/article.php/90621 Wall Street responded positively to the deal. Though Yahoo has done well over the years, this particular acquisition was something that they certainly regret. Cuban, who lives the life of a king, must laugh himself to sleep every night while pondering his good fortune.
I sold ICG to Level 3 in 2006. I did it because our investment group and executive team crafted a turn-around plan that suggested these properties would be worth more if they were part of a larger entity. I did it because our investors needed a big win (marked by a liquidity event) and because certain members of my executive team desperately wanted to put cash in the bank. I did it because recent meltdown memories (including just prior to us at ICG) included companies that began to show signs of turn-arounds (often through bankruptcy or debt restructurings) only to be faced with yet another crisis. In the back of my mind, I feared we might fall into the same trap.
At the same time, I was convinced that we were selling way below value. Hindsight is 20/20 of course, but I know now how right this conviction was. We sold ICG for $170M, resulting in a total exit of over $225M on our $8.7M investment.
Level 3 got a bargain for ICG. Our revenue was $80M and growing at 15%+ a year. Our EBITDA was $25M and was growing at 20% annually. Our free cash flow was $1M/month and growing. Our franchise was a vast and unique network in Colorado (and to a lesser extent Ohio)–replacement value was well north of $150M. Today, the business would have been generating $35M of EBITDA and have been valued over $350M. It pained me to let it go at the time. I pains me even more now.
This experience led me to better appreciate Warren Buffett’s frame of mind. I will chat more about this in a subsequent entry. For now, I want to emphasize why I think over-focusing on exit strategies is harmful.
Too often, in my mind, companies tailor their strategy to “how would buyer such-as-such value my business?” Or they look at others (including investors) and get enamored with eyeballs, seats, page views, clicks, lines, route miles, pops, or other potentially meaningless measures of value. My belief is that way too many executive teams (and investors!) unknowingly get confused between building a solid business with chasing the latest get-rich-quick trend.
Focusing on exiting promotes short-sighted behavior. It moves focus away from fundamental long-term decision making. It often tugs a company the wrong direction. It is why I now explicitly discourage dwelling on exit strategies.
I focus on the following: Do we have a solid franchise? If not, what one are we trying to create? If so, how do we make it stronger? How will this translate into predictable and abundant free cash flows? Let’s do all these things extremely well. Let’s not get all worried about how a strategic buyer or Wall Street analyst will value our company based on today’s metric-du-jour.
Do me a favor. Don’t mention this to my investors. They cannot help themselves: exit strategy is in their DNA.
