No one in the world could have used an Exit strategy better than Abhimanyu during the Mahabharata war. In Indian folklore, Abhimanyu was the son of the great warrior Arjuna and had learnt a deadly military technique called the ‘Chakravyuha’ that involved trapping enemy soldiers in an enclosed lotus like formation. When this technique was applied, enemy soldiers could not escape the layered maze formation of opposing army soldiers and they would be slaughtered. Interestingly, Abhimanyu learnt this technique as an unborn baby (in the womb of his mother) listening to his father discussing this technique with his mother. Unfortunately, the conversation was not completed and hence Abhimanyu did not learn how to EXIT the Chakravyuha. He was subsequently killed in the battle.
Most entrepreneurs are modern day Abhimanyus. We know how to start up a Company, how to create the initial momentum and velocity after which some of us even succeed in getting the business funded. However, like Abhimanyu, almost everyone fails to EXIT. You can prescribe that to destiny (Abhimanyu could not have prevented his mother from falling asleep), but very often, entrepreneurs themselves create the situations that lead to no-exits.
Consider some current ‘exits’ in the Internet Media and Entertainment space (IPOs not considered here):
|Company||What it did||Acquirer||Why was it acquired?||Value of deal*|
|Innovative idea||AOL||A facebook answer for AOL?||500k US$?|
|Social payments platform for virtual goods||Needed for its own virtual & social goods foray||70 million US$|
|Changed the paradigm of online entertainment via a UGC video platform||Massive scalable display advertising revenue opportunities that Google had to capture||1.65 Billion US$|
|Online news & content destination||AOL||Has a massive reach of high net worth Internet users and its scalable content engine||315 million US$|
|Undisputed platform Leader in mobile advertising||An obvious compliment to Google Adwords and Adsense||750 million US$|
|Amongst first movers in Social Gaming publishing and platforms||Electronic Arts||EA had to move to social and browser gaming – Playfish was the best bet||400 Million US$|
What seems to be the obstacles that come between Start Up Companies and their exits?
Product and Platforms offerings succumbing to becoming a Services business.
Increasingly, I have begun to notice that what starts off like an amazing product or platform play begins to transform into a services business - driven by revenue pressures and lack of seed funding.
Brands and large Corporations sponsor new interesting ideas and become the low hanging fruit for start-ups looking for some easy cash. These brands are in the business of experimenting with their dollars and may ‘spoil’ some promising start-ups. The challenge is in escaping the Chakravyuha of this services business.
Companies in service businesses are valued for people, their toplines and bottomlines. Typically, the acquirers will pay the same multiples that their own Company is priced at on the stock market (Topline to Value, EBITDA multiples, etc) and that value matrix can be quite brutal. However, there are a few exceptions - Microsft bought leading 'digital services’ company aQuantive for 6.6 billion US$ (and lost massive money on that deal), but the ‘magical’ or let me say ‘irrational’ and ‘competition driven’ (who buys you first) pricing of platforms and product companies can never be replaced!
If you review the chart above, you will observe that they are mainly platform, media and idea stories.
So, if you cannot survive without services, carve up the business between owners in such a way that at least someone at the founder’s level is thinking of product and platforms and not getting ‘quick sanded’ by services.
Geographical and Environmental Challenges
Search for the ‘list of acquisitions by Google’. You will be surprised to see the laundry list of Companies you have never heard of, which have been acquired for typically non disclosed values (meaning small change) by Google.
There is a certain amount of what I like to call ‘start-up liquidity’ in the USA that helps small interesting start-ups to get acquired by Facebook/Twitter/Google/AOL/Microsoft and the other giants quickly. There are a large number of merchant bankers, intermediaries, super angels who are always fixing deals and finding such start-ups (sometimes just bought for the team) for the big buyers. There is also money that is blown up for experimenting and for even killing ideas that can threaten a large business. Values may be nominal or subjective, but it does give the honor of a successful exit to an entrepreneur and allows her to move to her next venture with her head held high.
We lack that ecosystem in India both on the acquirer side and on the intermediary side. The Internet unfortunately is stuck in India and the dominoes effect is that it’s not lucrative to buy anything in a market that refuses to grow either in usage or in revenues. At least on the mobile side, because of huge usage and revenue we have a listed Onmobile and soon to be listed One97.
On Nasdaq, you can list your Company even though you have losses. It’s just about positioning your Company and letting investors make a wise choice. Makemytrip.com was barely profitable a couple of quarters before it was listed on the Nasdaq – yet it soared to an almost 1 billion dollar valuation!
The Indian stock exchanges have Neolithic laws of listing and demanding a history of profitability. There is of course some logic to it – past scams of rubber stamp companies getting listed have robbed poor investors of their moneys, However, fresh thinking is required before letting nimbler and promising start-ups list or offer their shares to common investors.
The Jigsaw and its missing pieces
One approach to creating exits is to identify a business jigsaw and then figure out if you can be the ‘biggest missing’ piece of it. It’s a difficult proposition and requires God Like vision, but sometimes that line of thinking can sculpt exits.
Take a company like Netmagic for example. I have known its founder Sharad Sanghi for 12 years now and he has slogged to build up his company. I think that Sharad realized long back that one day India will become important for the major International IT companies - who will need their own data centers to efficiently service consumers. Netmagic has done that well and I am sure Sharad is regularly refusing acquisition offers.
Games2win believes that being second to Zapak.com (which is owned by ADAG and hence is not acquirable) it will be valuable for its no. 2 position in online games in India. Cleartrip.com and yatra.com understand that makemytrip.com has paved the way for Indian travel portal valuations and hence they look like lucrative IPO or acquisition candidates. I think Komli is the only large, well-entrenched advertising network in India that has a great team, best of breed advertisers and great technology at work. Why wouldn’t a Microsoft or AOL acquire it when they look at Indian online advertising seriously?
My advise to entrepreneurs who have started up or are on the brink of doing so – give exit a very serious thought. The last thing you want to be is in Abhimanyu’s situation.
Also, I have deliberately not mentioned a couple of points because I expect my readers to fill them up for me. So do write your views on Exits and complete this blog piece!