Plan a graceful exit
Executing ambitious growth strategies for your business, it is also the right time to think about the exit. Choosing the right exit route at the right time is important for exiting profitably and building ventures with value.
Indian entrepreneurs are maturing. They have started building organisations that they can exit easily and start new ventures. Earlier, the Indian entrepreneur was known to build enterprises that were handed over to the next generation as a legacy. However, the legacy often became a burden in the long run.
With changing times, entrepreneurs have realised that the true spirit of entrepreneurship is in the creation of wealth generating opportunity, and not just in its maintenance. Planning exit strategies right at the start of a business venture increases the enterprise value.
BE EXIT READY AT THE START
“An entrepreneur should always think what the ultimate end-game is, and build a business according to it. Right from Day One, consider what is going to be the end-state, plan for it and build your company along with it. Show value for the buyer or investor, which will happen if you reverse engineer the business and build attractive elements,” says Krishnan Ganesh, Founder and Chairman, TutorVista. Ganesh made partial exit from TutorVista when education publishing firm, Pearson Group, acquired 80 per cent of its stake in January 2011.
When asked about the reason behind his exit, he explains, “I prefer building new companies rather than running and expanding them.”
“An investor must know about the exit right from the beginning, because if there is no exit strategy, the investor will only invest and not get his money back. The second dimension to it is time horizon – over what period does an entrepreneur consider an exit, because the investor also has a certain holding period in mind, which is an area where one needs to have an alignment. The third area for alignment is the price at which one would consider an exit to realise adequate returns. Timing, pricing and in principle agreement are a few components that need to be taken care of,” says Sanjeev Aggarwal, Co-Founder, Helion Venture Partners, who invested in the online travel portal, Makemytrip.com, and founded Daksh eServices, which was acquired by IBM in 2004.
PROFIT? NOT ALWAYS
Manu Agarwal had founded the biggest online portals for cricket (Criclive.com) and travel (Shubhyatra.com) in 1999, when e-commerce was almost non-existent in India. However, his exit from both the portals was not a fairy tale. The companies got caught in the dotcom bubble when they were sold. In 2000, Criclive was acquired by Lalit Modi of Modi Entertainment Network, while Thomas Cook agreed to acquire Shubhyatra. Manu launched Naaptol.com in 2008 with a capital of `1 crore raised from family and friends.
“Basically, these companies were meant to grow much more. Once the expected growth was achieved, we intended to find a strategic partner to sell off the stakes. We were fairly small as a player at that time and it was clear to us that in order to grow the business, we would need a strategic partner. Modi Entertainment Network, which was already running ESPN in India as a pan-India distributor of the channel, had a lot of presence on the cricket side. So, we partnered with them and sold almost the entire stake of Criclive,” Manu reminisces.
Both the portals had been launched as subsidiaries of the larger firm, Design Expo, an internet technology company, started by Agarwal in 1998 with savings of his own and fund raised from family and friends. In 2001, Agarwal had to sell Design Expo to a Canadian payment systems company, SLMsoft, because it didn’t turn out to be largely successful despite achieving a certain market share.
The funding for the two portals was raised from venture capitalist firm, Upstart Advisors. “At the time of exit, they got about three times of the money invested (RoI), which was 300 per cent in two years!” Manu says.
Taking a wise decision and choosing the right option is more critical than the timing of the exit, feels Raman Roy, widely known as the father of Indian Business Process Outsourcing (BPO) industry. He says exit strategies are very situational in nature. “There is no right or wrong time of figuring the options. One should be aware of those options and their timings. So, what you exercise at a particular time is what is good at that moment for the business compared to what options can there be in the future,” says Raman Roy, Chairman and Managing Director, Quatrro Global Services.
Raman’s first entrepreneurial venture, Spectramind, was started in 2000 with funds from VS firm, Chrys Capital. In 2002, Roy sold Spectramind, which had by then become the pioneer in the BPO industry in India, to Wipro for $175 million. “At that time, we had the option of roping in other investors, who offered better evaluations than Wipro. But when Wipro took interest in taking over and expressed a desire to invest, we got keen to go with them. They saw great value in aligning the needs of the customers of both the companies and so, we went ahead with the sale,” Raman says.
After successfully exiting Spectramind, Roy came up with another BPO, Quatrro, for which he raised $100 million from a foreign VC firm, Olympus Capital. “It was choosing the right option that got us a triple digit RRR (Required Rate of Return) when we exited from Spectramind,” he informs.
It is important to ensure that a company is built keeping in mind that it has to last, and not that it will eventually be sold off. So says Sanjeev, who had founded Daksh eServices with his former classmate, Pavan Vaish, in 2000. “If you are a high quality employer with good HR practices, you can build an enduring company that a lot of people would be keen on acquiring. One should not build a company to be acquired; one should build a company to last,” Aggarwal says.
Aggarwal’s venture, Daksh eServices, was acquired in 2004 by the multinational technology and consulting corporation, IBM. This acquisition, he says, was aimed at bringing value to the company. “We built a company, which was very customer focused. IBM was looking to start this new line of business of outsourcing and seeing our company’s value and success, they found us to be a good vehicle for entry. Since IBM was synonymous with quality, it also made sense to us to align with them as we felt it would bring value to our employees and customers,” Sanjeev says.
After exiting successfully from Daksh, Sanjeev went on to start a Venture Capitalist firm called Helion Venture Partners. “The idea behind starting Helion was transferring all the learning, which I had acquired while building Daksh, to new entrepreneurs and thus help in the creation of new companies as well as value for our investors. We wanted to invest in young companies because they not only need money, but also a lot of hand holding. Having been through all this at Daksh, I thought it could be a great help for young entrepreneurs,” Sanjeev says.
KNOW YOUR VALUE
There has to be a continuous method to know the value of one’s own company and acting swiftly in times of wide disparity between the price and value, says Rahul C Mehta, Founder, Upstart Advisors. “As far as the timing is concerned, entrepreneurs should exit when people ask “why?” and not “why not?”. There are only a few windows in the life cycle of a company, when entrepreneurs can exit on excellent terms. However, a passionate entrepreneur will, of course, be driven beyond monetary considerations and the credentials of the buyer, even in the case of a 100 per cent sell out or any other influential exit strategy. Though, there are some companies and businesses, which don’t require an exit strategy!” he claims.
Helion, which had invested in Makemytrip.com, India’s biggest online travel agency, successfully made a partial exit last year. Sanjeev says, “We had made a significant amount of investment in the portal and it has been a very successful investment for us. It is one of the very few companies from India that have gone on to be listed on NASDAQ. It was not only a profitable exit for Helion, but also provided a boost to entrepreneurs.” Currently, Helion Venture has $600 million under management.
An entrepreneur, especially an SME entrepreneur, should think of building a sustainable business and graduating from micro to small, from small to medium and then into a large enterprise by creating the best product possible for the stakeholders. A profitable exit is essentially the product of success that a business achieves over the years.
Unlike in India, where an investor also looks into the exit strategy that an entrepreneur has in mind while starting the business, your venture will not be funded abroad if you talk to the investor about your exit strategies. Jay Meattle, Founder and CEO of Shareaholic, an online content sharing company based in New Delhi and Boston, says, “In the US, if you go to a VC meeting and talk about your exit, I don’t think you will be funded because that’s a completely wrong approach.”
Meattle has been part of two exits earlier – Lookery.com, an online advertisement network, and Compete.com, a web traffic analysis firm. Both got acquired in 2008 by Adknowledge and Taylor Nelson Softres respectively.
Sharing his global perspective over starting and exiting a company, Jay says, “When an entrepreneur builds a company, he should think about a sustainable enterprise, which ultimately makes money and serves every concern instead of trying to optimise for an exit. A successful exit is possible when you optimise for the long term and if opportunities come, you have to evaluate each one of them. It is actually a case-by-case thing. However, if you have the long term in view, doing strategic things you need to do to build long-term business is right instead of trying to get short term value, which might harm your business.”
PLANNED EXIT: THE KEY TO SUCCESS
The fate of every business depends on the exit routes it plans and creates for a variety of investors and stakeholders. A company that performs poorly in the startup can still get a chance to succeed by inviting investors with the help of the right exit strategy. However, even a company that starts well can flounder if there is no exit plan. It is the exit route and not the entry plan that determines enterprise value. Exiting is a crucial process, so layout the right routes. It takes a considerable time to get this right. Overcoming the problems to succesfull exit needs a pro-active approach. In most cases, briefly discussing the exit strategy in your business plan attracts more eyeballs than your sales projections. Hence, exit by plan, not by default.
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BetseyJanuary 05, 2013 at 9:34 pm