Tips for Calculating What a Startup’s Future Exit Might Look Like

Written by Tom Fairey

14 March, 2022

Draper Esprit Principal Philip O’Reilly Describes the Hottest Investment Areas, “Dead Equity”

“Exit” in the business world is when an investor decides to get rid of their stake in a company. Generally, for a successful exit to take place, an investor wants to see that the company either goes public or is acquired by another firm. Either way, the venture capital firm can “exit” their stake by selling their shares on the open market.

Philipp O’Reilly knows a thing or two about this. O’Reilly has been a principal at Draper Esprit in London since 2017. Prior to that, he was an associate with Withers Tech and was an MBA intern in Google’s finance department. O’Reilly has law degrees from Trinity College in Dublin and the London School of Economics and Political Science, and has an MBA from Wharton Business School.

O’Reilly recently talked to me for an episode of my podcast, Back Yourself.

What Kinds of Exits Are There?

There are two kinds of exits: initial public offering and strategic acquisition.

In an initial public offering, a company sells its shares on a stock market. That can be on any stock market and does not necessarily have to be the entire company, though it usually is. Initial public offerings, or IPOs, can be highly anticipated events with a lot of fanfare, such as the recent IPOs for Zoom and Uber, or they can be small and mostly unremarkable. While Manchester United is an example of sales of stock of a portion of a business, in general, the entire business flips at once and the founders stay on and run the business.

A strategic acquisition is a much more common exit strategy. In a strategic acquisition, a startup is sold to a larger company that is active in the market. Sometimes, though, the acquisition is part of a private equity roll-up strategy, where a group of investors buy up a number of small businesses and roll them together to sell on the market. More typically, it is a big company acquiring an interesting technology or team.

Why is a strategic acquisition more popular than an IPO? Well, there are many reasons, but the main one is that it is easier to build a product than it is to acquire customers, meaning that people will buy you for your customers.

When You Build, Think About Why Will Buy You

A smart strategy to keep in mind as you build is to think about who will buy you, O’Reilly said. You can do this by understanding who in your industry is likely to want your product, your tech, or your customers, and then determining what they will pay. Are they buying a business based on a multitude of earnings or a multitude of revenue? You can figure that out pretty quickly, said O’Reilly, and understand what your exit may look like.

How do you figure that out? Many data companies supply acquisition figures, O’Reilly said, so you can look at a history of company revenue and acquisition amounts.

What You Should Do Now to Make Your Company Attractive

As you position your company for an eventual strategic acquisition, said O’Reilly, spend time pondering what really has value in your company and who it could be strategically valuable to. Grow toward that. It may involve getting a larger sales force to increase your customer base or landing a marquee customer who has to have your technology.

What Are Hot Industries Right Now?

O’Reilly is constantly on the lookout for what is emerging, and what is currently on his radar is quantum computing.

The excitement around quantum computing is based on the premise that our current computers and their binary code have reached their maximum effectiveness, and future gains will be merely incremental. Quantum computing uses the forces of quantum physics to store data and perform computations, which will wildly advance business solutions, drug discovery, and more.

O’Reilly said he is highly interested in early market movers and learning all he can about this budding tech.

What Makes a Bad Venture Capital Partner

Someone in VC is giving you money. Great, right?

Not necessarily, O’Reilly said. Not all money is good, and in particular, he recommends that founders avoid what he calls “dead equity.” Dead equity is people who want to invest in your startup — perhaps for a tax break or perhaps because VC seems sexy — but who won’t lend a hand to your growth.

When considering VC, founders should know if they will do anything beyond writing a check.

The Takeaway

Yes, the startup process is complicated. One way to keep it all in focus is to visualize your exit strategy. Think about how you will go public, or who will buy you, what you might be worth, and what steps you can take right now that will increase your value down the road and make you a more acquisition target.

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