TiE Midwest hosts a monthly Charter Member, invite only dinner with some of the best in the Chicago entrepreneurial community to discuss business trends, share learnings and create dialogue to provide thought leadership. In March, TiE Midwest brought together Jai Shekhawat, CEO of Fieldglass Inc and Bob Zieserl, CEO and Chairman of Vital Sensors, at Sunda to share the mindset of the entrepreneur and the investor when founding, building, investing and selling a business.
The following is a visual and written summary of the conversation led by Jai and Bob. Please feel free to comment, share insights, build on ideas and keep the conversation going.
Introduction by Kevin Willer
- At Google for 10 years, could only make incremental changes there.
- Welcomes challenge to make a tremendous impact at the CEC.
- Was offered the position and accepted the challenge of helping to grow companies of all kinds and connect ideas, startups, investors, and angels.
- What’s next: talk to a lot of people about what the CEC should be and what kind of role to take on. We want to help entrepreneurs build companies with mentorship, networking and education.
- We have strong ties with TiE Midwest, ITA, Excelerate and other organizations across the city. Work is cut out for me.
Discussion: Timing your Exit – Don't Ride it Over the Top!
- There are two sides:
- Entrepreneurs don’t always want to get big; who starts a company with the intent to sell it?
- Investors want to invest and exit within 7 years; there’s always an intent to sell.
- A partnership is about “growing something to be harvested.”
- There’s a lot of pressure when you’ve started a company and think you want more money by way of investors.
- When we started, we weren’t interested in selling.
- Now that we are profitable, it’s a different story. We’re still not sure we want to open the kimono when approached to sell.
- You have to develop a story to sell; you sell the business once the business begins to bud and flower.
- The U model: starts with start up mode of little capital to raising funds until you get into the curve of wealth creation and in 7 to 10 years, on the other side of the curve does one get to the point of ready to sell.
- It’s hard to have the dialogue with OPM (other people’s money).
- Venture is a great fit for some but for most, it’s not always the right way to go.
- Most entrepreneurs don’t know the rules of the game.
- The CEC should educate entrepreneurs that VC’s have priorities different from theirs.
- The dynamic of the acquirer:
- Many wait a long time and are ok with paying $1BN for something of value;
- Others grab at opportunities because don’t want to miss the train.
- Fast exits are history now and pretty uncommon; exits used to be within a few years and now it’s a longer time frame, sometimes as long as 10 years.
- The exit is for incumbent investors and can be disruptive.
- It’s important to communicate with employees so they know what to expect; this can create more loyalty and dedication to success.
- Early exits: think hard about selling
- If it’s early, it’s based on hope
- If it’s late, it’s based on results.
- Hope vs. results is common scale when looking at exit strategies.
- If you build to sell, you will fail.
- 7 years is a vast landscape. If you who you want to be acquired by, 7 years is a long time, a lot of conditions and markets can change in that time.
- Family owned businesses tend to be more conservative and have a long-term view.
- No outside investors means lax when it comes to governance.
- Investors give companies a really tight set of standards.
- Bankers can be essential in selling but you really need to be forthright with them in order to get them to think like an entrepreneur.
- Don’t think about an exit to early:
- Rising tides lifts all boats; the industry is in a growth spurt.
- Make yourself a top player
- Define the growth strategy and execute.
- When selling, think of destination economics; most investors think of the payoff down the road.
- The idea is to always sell the company to someone who will grow it more than you did. Again, this is a hope vs. results issue.
- The more you consumer capital, the more the script becomes predictable.
- Entrepreneurs should be prudent about the amount of capital to take.
- But how do you know when to push the gas pedal?
- There is such a thing as raising too much capital.
- Raise late, raise plenty: use timing.
- Cloud computing has changed the nature of business - makes cash lean businesses go farther in distance before raising funds.
- Valuation: how much do you think your company is worth?
- It’s what someone on the other side of the table is willing to pay.
- Are the employees still coming in and turning on the light?
- Founders are typically emotionally attached to business and won’t let it die.
- Create a bidding war.
- When selling, you want good bankers, good employees, and good investors. It’s a collaborative effort of all parties involved.
- When to know when to sell: you have to be able to answer the needs of the co-founders, employees, timing and the valuation.
- Compensating employees drives them to work harder.
- Today’s venture capital industry rules need to be rethought.
- What does a VC do?
- Invest
- Hire and fire
- Sell.
- The climate right now is really good for entrepreneurs.
- The down round: “when no one is interested in buying.”
- What are the reasons for a profitable company to seek out growth capital:
- Bolster equity
- Ina better position to negotiate terms
- When it’s a good time to sell.
- Venture – is it dead?
- Raising money isn’t always sound, can be inefficient and gets us back to the U model prevailing.
- There’s a sophistication with investments now – it’s often a blend of angel/venture or angel/seed capital, VCs.
- Startup teams typically need ten people so that’s about $1M to start.
- It’s important to keep in mind you need to build something that can be sold and worth the amount you’re selling if for.
- A rule of thumb: if you’re losing money every month, you’ll need at least $18M to last the year.
