I’ve worked predominantly in the high-tech sector and the majority of that time with high-tech startups (two of which I founded). It’s in the last few years that I’ve worked outside the high-tech sector and it’s made me reflect on the general differences as to how high-tech startups are built vis-à-vis other types of companies.
I’ve come to believe that high-tech startups hone growth and exit strategy skills better than most other business environments. The primary driver for a high-tech startup is to build something significant and take it to exit. Exit is realizing the value in the equity of the company. It is this future value that is sold to external parties and investors.
The high-tech startup model is one that needs outside capital, typically venture capital. The capital is needed for pre-sales/pre-revenue expenses, the majority being R&D. That doesn’t mean that every high-tech startup closes financing, the odds are actually against closing. But it does mean that high-tech startups are built with an eye to exit. Investors along with other shareholders require an exit transaction to realize a return on their equity.
When attracting outside capital you need to demonstrate the same things that will be attractive to any buyer interested in your business. And that is that the future value of your company will be significantly greater than its present value. In other words that the risk of investing will be offset by a much bigger future return. The increase in value will be affected by market size, revenue, market share and customer diversity.
So a high-tech startup needs to grow to build its value and ultimately realize an exit transaction.
And any business owner considering the future sale of his/her business needs to build business value to realize an exit transaction.
High-tech startups build value and realize exit transactions in a way that can be modeled for any business owner planning a future exit. That is by:
Your plan should be big in vision, narrow in focus, strategic and with a defined exit. Shareholders want to be able to believe that their equity will be of greater value in the future than in the present and that there will be a mechanism (exit) to liquidate equity.
For a high-tech startup (along with any other business) exit mechanisms can either be an IPO or an acquisition. In either case the defined exit mechanism should be supported by an established plan to achieve it. At a minimum the plan is strategic and includes metrics to assess performance and adapt the plan accordingly.
The plan needs to also include timelines, defined goals and tactics to achieve a quantified:
- growth rate;
- revenue level;
- operating margin;
The capacity to grow is an indicator of a business’ ability to achieve a future value that is greater than its current value. In other words, growth rate impacts a business’ valuation. The potential to grow present value is just as important to an investor as it is to any buyer interested in your business. The attractiveness of a company’s future value is a measure of the time the capital investment will be held as equity and the return the equity may produce once it is liquidated.
Growth provides the means to build a company’s value as well as indicates the extent to which future value can continue to increase. Consequently, growth is also a critical component to a company’s longevity and sustainability.
Growth metrics related to building business valuation can be varied, some examples are:
- number, size and type of clients;
- share price
- EPS (earnings per share);
- number of products;
- market share;
A KPI related to growth could be the rate at which the above listed individual metrics change (increase/decrease).
To recap, in order to realize an exit transaction you require a plan and growth. High-tech startups are driven to achieve a future exit and grow something significant in size. High-tech startups hone the skills required for growing a business’ value along with those for defining strategies to enable a future exit transaction to be realized.
In future posts I’ll delve more deeply into creating an exit plan and implementing various tactics to grow.