We’ve written recently about how bootstrapping founders can help themselves navigate a very tight credit market. Now, the implosion of the investment banking industry promises to level what was left of the landscape for both IPO and M&A exits. Startup founders would be wise to reassess their strategic priorities.
With fewer opportunities to cash out of their current and future portfolio companies, the agendas of angels and VCs will also shift. Founders who are raising funds will certainly want to revamp their pitch decks, if they are to have any success raising capital in the current climate.
But how? What should a startup founder put on that slide in their investor presentation that addresses potential future outcomes? How can founders adjust their messaging to demonstrate to VCs that they have their strategy aligned with the needs of the investing community now? We asked Faysal Sohail, the managing partner with CMEA Ventures, for advice. Here’s what he had to say.
Sohail’s 5 Ways to Build a Crisis-Proof Business:
1. Start with gap analysis. Build companies that address product gaps left by large companies. Always make sure you have two or three potential buyers with real market caps and which can pay higher exit multiples. For example, in software space you can build a vertical that will be interesting to SAP, Oracle and others. If you are successful, you will have at least a couple of buyers. In the Internet space you have at least three or four buyers that can provide a good outcome (Google, Yahoo, Facebook, eBay) In this case it means building a product/feature instead of a new platform. It is very difficult for existing players to integrate new platforms but a product built on their existing platform becomes valuable on day one.
2. Start with the exit multiple in mind. We often say, “Start with the end in mind.” Here, it means avoiding business sectors that pay low multiples on revenue or earnings, such as semiconductor, capital equipment or consumer companies. Instead, choose sectors that pay for strategic mergers rather than revenue aggregation. These are usually high-growth sectors. Examples would be clean technology, pharmaceutical and enterprise solutions. In addition, make sure the sector you choose has two or three potential acquirers in it, with healthy market caps, meaning they can pay higher “exit” multiples.
3. Focus on “must have” products/features with large markets. Nice-to-have stuff all goes out the window quickly. This means avoiding merely “lower cost” or “higher productivity” plays. At CMEA we see a lot of technology entrepreneurs optimizing a small part of the solution. While these things are important, and attractive in good times, they are insignificant in the larger context. For example, higher productivity features may optimize power savings of certain circuits, but these circuits may only take 10 percent of the chip. This lack of scope is the biggest issue with most deals that don’t get funded.
4. Look for existing sales channels you can tap into. Developing new channels can be the highest cost for a startup, and is not a good use of venture capital.
5. Look for strategic funding from corporate partners. This can solve both funding and potential exit issues.
Faysal Sohail is Managing Director at CMEA Ventures, in San Francsico.