Saturday, May 20, 2006

Two contrasting views on exit strategies

Matt Inglot went to the Infusion Angels seminar -- I assume the one organized by the Entrepreneurs' Association on Wednesday in Waterloo -- and has written a very good summary of the talk. I wasn't there, but I had lunch with the Infusion guys in March and ran into them again on Thursday during the official opening of the Accelerator Centre. Infusion Angels is a new division of Infusion Development, a company based in New York and Toronto that is filled with UW grads and is now coming back to the area in hopes of funding the launch of a few startups a year here.

Matt says the Infusion presentation emphasized that the number one point that a VC wants to see covered in a pitch is exit strategy.

Which is interesting, and a little ironic, given what was said the day before the Infusion talk -- on Tuesday -- at a presentation hosted by WatStart by Derek Smyth, partner at Toronto-based VC EdgeStone Capital Partners.

Derek, who was a successful tech entrepreneur before becoming a VC, said that exit strategies are over-emphasized in business plans, and that when he and his partners make their case internally to invest in a company, exit strategy is a small consideration -- perhaps comprising a few sentences in the document they prepare for the other partners.

I won't pit the two comments against each other -- maybe if I had been at the Infusion talk and heard everything in context I would have interpreted it differently than Matt did (or not) -- but exit strategy is certainly not the main point you have to communicate to a VC. Market need, business model, and scalability all trump exit strategy by a wide margin.

Not that exit is immaterial -- I can think of one business plan I wrote where I thought the section on exit strategy was quite compelling. There were a couple of multinational companies that were snapping up -- by the dozens each year -- smaller companies in the market space being targetted by the company I was working with. I certainly made sure that this was outlined in the plan, and probably gave myself a virtual high-five when it was done. Unfortunately, this company had what may have been the most convoluted business model I've ever seen (despite my efforts to get them to change it) and the greatest potential exit strategy in the world can't overcome a business model where you can't figure out how anyone is going to make money.

In most cases, I wouldn't spend a lot of time at a seed stage worrying about exit strategy. It's good to present some plausible possibilities -- companies that you think might acquire you, and why. But it's not going to be the biggest hurdle you'll have to clear.

(Thanks to Ken Dyck for the link to Matt's blog.)

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