Friday, August 8, 2014

Should Seed Funding Decks Include a “Potential Exits” Slide?


Should Seed Funding Decks Include a “Potential Exits” Slide?


A recent Hunter Walk post on seed funding decks promoted me to respond. The post argued that exit slides in a seed funding deck are a bad idea for a number of reasons, four in fact. I took the view that, since it takes to views to make a market, I should offer some thoughts that challenge the post and indeed many of the observations by other commenters that followed. 

My start point - as an investor, not a philanthropist, I generally like to see my money come back. Hopefully with a big multiplier. I am also well aware that mega successful "unicorns" are rare and that most exits (so where I get my money back) are acquisitions in the sub $100mn range. So as an investor exits are a legitimate area of interest to me!

Bottom line I agreed with the observation from Mike Wallach who also commented on the post:
"Frankly, with a few exceptions, the pretense that there is really no interest in possible exits comes across as a bit disingenuous on both the part of the entrepreneur and investor". And let's be clear VCs have a clear and singular objective 0 much more so than angel investors in fact. Namely VCs have a fiduciary duty to maximize FINANCIAL returns to their LPs and a defined fund life in which to do that.
Here goes with my thoughts on the various objections to including an exit slide:
1. Narrows thinking? => shows strategic thinking
The exit map today is a point in time view. The exit map tomorrow, reflecting the evolution of the business, market place, competitors etc will be different. Only if you think today's exit map applies for all time will it narrow thinking. Rather it too will evolve over time with names adding and leaving, perhaps rapidly! A constantly evolving exit map (to be discussed/reviewed at every Board meeting say) shows strategic thinking not narrow thinking in my view. Also I would note here that having an exit slide does not mean (to me) the entrepreneur has "planned an exit" and hence is locked into a given trajectory. If they had a hard coded exit plan then even I would be alarmed - that is indeed narrow (and fantasy) thinking.
2. Speak of the devil and he will won't appear? => actually you need to proactively speak to the devil
In my view it is simply not the case that most companies are "bought not sold". That maybe well be true for a small minority of visible and successful big winner businesses, but not the majority. Yes we all want the big winner that has multiple suitors at the door. But they are few and far between. The way corporate M&A teams work in my experience is to monitor multiple targets overtly (ie have on going dialog with some) or covertly (you are on their watch list but don't know it.) The M&A folks will be part of ongoing buy vs build decisions with potential targets rising and falling in priority as the acquirer's own business and business needs evolve. In that context most small companies need to get on an acquirer's the radar and stay there - that means yes identifying possible purchasers, building relationships with them and hence a track record and trust that will make a potential buyer's purchase decision easier if and when they decide to pull the trigger. Of course that should not be the main focus of the entrepreneur ... but in partnership with the Board is something that needs to be thought through constantly even from an early stage.
3. Tell me how to create value, not just realize it? => yes but thinking realization is part of your competitor/partner landscape
Every high growth entrepreneur that receives money beyond F&F is in it, along with their investors, in it to build something big. And of course solving a real problem with a unique scalable solution is the route to achieving that big business. But let's not over do this. I know very very few founders who build to flip - so this point seems a straw man to me. The exit slide is one slide. It shows a part of the picture that matters to most investors. (ALL investors are in it for an exit at some point. If they aren't then, I am sorry, they aren't investors.) And, to the "strategic thinking" observation above, to me a thoughtful exit slide shows me that the entrepreneur has a deep understanding of where her/his business fits in a broader context and crucially which large players don't do what he/she does. As such this is as much competitor and partner analysis as it is exit analysis.
4. Suggests risk aversion? => maybe but there are other ways to find this out!
All of my own nine investees have an exit map and yet also all passionately want to build big businesses. Maybe an unrepresentative sample but it seems too big a leap to go from the inclusion of an exit slide to an assessment of risk aversion. After all as one the other respondents in the thread noted many entrepreneurs are advised to include this slide ... and for good pragmatic (with no exit there is no "investment" just a non refundable "gift") reasons. Also there are other bona fide (to me) reasons as I have mentioned - the content (if robust) shows broad strategic thinking, it can show insights in to the way the M&A process actually works, it shows an understanding of the competitor/partner environment. There are plenty of other ways to assess risk aversion than jumping to conclusions from a slide in a deck.