Startups Exit Roulette
By Tony Clark, 2-Dooz Inc. – January 21, 2013 (Original Publication Date)
Thoughts of Silicon Valley startup exits typically evoke images of successful IPOs, of the likes of Facebook ($FB) and Palo Alto Networks ($PANW), and yield an impression that it is clear sailing from the funding of a new disruptive idea to a successful exit. What shouldn’t, but what may be a surprise is that the reality is much different. As recently reported in the Wall Street Journal, Shikhar Ghosh—senior lecturer at Harvard Business School—found that three-quarters of all venture-backed startups in the U.S. don't return capital to the investors. In other words, 25% of startup companies exit through the front door, while the remaining 75% quietly slip out the back door.
A typical back door exit plays out in several steps: sales fail to materialize at a previously expected rate; cash on hand redlines; investors signal a reluctance to deploy additional capital; the executive management team attempts a sell of the company; if the sale is unsuccessful, the assets of the company are liquidated; and, finally, the company is dissolved.
No company is started with an expectation of failure. However, the harsh reality is that many startups will suffer an unceremonious exit. At 2-Dooz, we provide our clients with assistance at every stage of the startup company life-cycle, including exits. In addition to being able to assist with the outright sale of a company, one of our specialties is the disposition of assets using the 2-Dooz auction website. Dissolution through an asset auction can maximize the value of disposed assets and is an alternative to equity sales and bankruptcy.
For the unfortunate three-quarters of all startups, the goal at exit should be an efficient, cost effective dissolution. Additional cash burn should be minimized and the realized value for the company’s assets should be maximized. 2-Dooz can help to make this goal a reality. In addition to our online auction platform, we offer a range of customized, value added, offline services including asset market analyses, the preparation of marketing and sales materials, and the identification of potential buyers. Contact us today for a free consultation.
For venture investors, successfully managing the 75% of their investments which exit through the back door requires minimizing dissolution costs and maximizing the realized value for the assets in that part of the portfolio. Part of a comprehensive portfolio management strategy, thoughtful care and attention to the underperforming parts of the portfolio can help to maximize the return on the overall portfolio.
Those are my thoughts. And, as always, I invite and look forward to learning what you think.