December 2010 Archives

Exit Engineering


Occasionally in one of my conversations, we will talk about what we think makes a great investor, angel or VC. Most of the time, we talk about being lucky, having the ability to spot great companies and opportunities, and sourcing amazing dealflow and getting into deals that others can't get into. But almost never talk about exit engineering.

Being able to create exits from your portfolio companies means that you are able, more often than not, to produce returns from everyone of your investments, even those that are seemingly lost causes. That means you will seemingly be able to produce returns in any kind of market, and consistently deliver over time. Those that aren't so good at this leave making returns to the whims of events mostly out of all our control - that doesn't sound like stacking the odds in your favor!

I think that exit engineering is both a science and a skill, some learnable and some not so easy to just "learn". Here are some thoughts about what makes a great exit engineer, some which I think are readily achievable and some that are not:

Achievable Skills/Traits:

Natural Salesman - From always talking about your portfolio companies to actively pursuing an exit with a corporation or individual, you are always out there talking up your startups and either subtlely or overtly promoting them. You never lose the opportunity to sell how great they are to someone and always have in your pocket a bunch of startups to sell.

Great Negotiation Skills - Selling is one aspect, but you also need to be able to squeeze out the best possible deal and not just any deal.

Strong Relationship with the Founders and Board of Directors - If the other people who control decisions in the company trust you and your judgement and you can convince them it's time to exit, then this helps things tremendously over trying to convince them it's time to exit.

Knowledge about the Economy - With the recent economic crash, I've been thinking a lot about economic cycles (see my post Tough Economic Times Ahead and the Next Stage in Startup Strategy) and their affect on investing and startups. Great exit engineers need to be acutely aware of the macro effects of the economy and know when it's OK to press your bet or to harvest returns before the rug gets pulled out from under you, either lengthening the time to harvest returns and/or suppressing the actual return itself.

Knowledge about the industry, sometimes proprietary - You must have your ear to the ground on what people are doing inside corporations and around industry. Your network must include people who can give you this information, and hopefully that which nobody else has. How else would you be able to sell a startup to a company who is trying to make headway with a stealth strategy? If you don't know someone is looking to do something in a given area, then you'll miss the opportunity to sell them a startup which could be something they are looking for to help them execute that strategy.

Great Network of People Who Matter With Respect to Exits - You might have a strong network, but you need to know the people who are the actual decision makers in organizations. Sometimes it's clear, and sometimes it's not. Talking to the rank and file is fine to get certain things done, but if you're going to sell a company to another one, you need to figure out if the it's the head of corporate development or the CEO that you need to be talking to. Perhaps even a board member may be the best person, or they also may be the worst person.

Not so Easy to Achieve Skills/Traits:

Creative - Creativity can play a big role in creating exits. Sometimes, you have to be able to package a startup in unique way to sell it to someone. It also may not be obvious who might want to buy your startup but with some creativity, it may be possible to sell a company to someone who you'd never think would want that particular one.

Great at Cultivating Exits - Some exits are more timely and obvious, like when another corporation makes is relatively public they are pursuing some strategy. Some are years in the making, as you network and plant the seeds of needing a particular startup to achieve some business goal. Great exit engineers will meet with folks regularly and subtlely steer people to want one of their startups and it could take a long time.

Intuitive - Intuition is so important, both in knowing what to do in a given market, sensing what the tipping points are in a negotiation, or knowing to whom to sell a company.

Amazing Sense of Timing - Acting on intuition and market knowledge, the exit engineer somehows just knows when it's time to harvest returns on any investment. Anyone else is either too early or too late.

Trust Among the Network - Having a killer rolodex is the first step; what's harder is actually having worked with many of them and they know you enough to trust you in something that you present to them, and will consider it seriously and first, over and above others.

Personal Relationship with Network - Having worked with people in your network and gaining their business trust is great; hanging out with them and their families, playing poker and golf with them, etc. makes that relationship even stronger and more likely that an exit will happen. Friends dealing with friends happens more often than you think.

Produced in the Past for People in the Network - Even better than trust and personal relationship, you've actually made money and/or other positive results (ie. fame, advancement, etc.) for the people in your network. Your network knows they won once with you; that means they are likely to win again working with you.

A bunch of us were noting that the best VCs were great at spotting fundable entrepreneurs and the ideas that they brought with them, and also giving them valuable business advice and helping them along build great businesses. However, we also thought that the VCs who rose to the top of the heap were the ones that were also great at exit engineering and time after time they seemed to be in deals that were able to exit for tremendous returns.

These are the Sequoias and Kleiner-Perkins of the venture industry who have been around the longest and have been able to produce returns for their investors fund after fund, and through any economic conditions. With the rise of so many prominent, active angels in the Valley, I think that we'll see there will be angels who will have amazing returns and, as I theorize, be excellent exit engineers in addition to all the other help that they would give.

This also provides support for the argument that entrepreneurs should always try to find helpful investors who are also excellent exit engineers, assuming that your goal isn't just to build a sustainable company but also to produce exits for those who own parts of the company. That should make exit engineers more attractive to bring on as investors than others, meaning you can get into better deals.

So it seems that this is a worthy skill to acquire, although some of it is learnable/achievable and some of it may be skills that are more about the individual and what they are capable of, than something that can be learned.

I, for one, will strive to improve my exit engineering skills over the next few years...

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This page is an archive of entries from December 2010 listed from newest to oldest.

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