In the “angel pitches” I see in our meetings, the Exit Slide
seems to be frequently a weak part of the presentation. This is unfortunate
because the Exit constitutes the major determinant of the pay off
that investors may expect. Why? Because
investors typically do not see any return of, or on, capital until the Exit. The
valuation of the company when sold will determine the pay out. The IPO case,
most likely farther away in time, is much the same as the market valuation
would reflect similar considerations.
Let’s focus then on the M&A Exit.
The following discussion involves many generalizations. As
with most generalizations, countless exceptions can be found. However, investors rely on these
generalizations particularly to form first impressions in their due diligence.
A wise pitcher, then, should be aware of those perspectives and speak to them.
Apart from strategic considerations unique to the acquirer,
the M&A valuation of the venture being acquired will reflect the growth
rate in sales and earnings (or reduction of losses) as prognosticators of
future profitable growth.
Moreover, the valuation will also reflect some multiple of
annual revenues, which number correlates with other companies in the same
industry. The correlation exists because that multiple reflects each industry’s
underlying fundamental risk. Some examples:
Rapid scaling of a software, or cloud-based, product or service is relatively
easier than scaling a business that requires heavy capital investments. Similarly
a line of “fashion” products that depend heavily on the company’s design guru
to hit the sweat spot of unpredictable consumers carries inherent risks.
Ski manufacturers live in a very competitive and concentrated market where product performance is
difficult for consumers to measure (few can try before they buy) and where the
appeal of the graphic design and style can make or break a sale. This complex
and unfavorable state of affairs is reflected in the revenue multiple that
applies to most M&A in skis and sporting goods: 1X. That multiple, in essence, says that
acquiring companies give a low probability of repeatability of profits' growth. Conversely, medical
devices valuations are in the range of 3 to 5 and even 10 times revenues, which
reflects that, most often, once they gain traction, they have patents to protect their markets and
margins, and can grow more reliably.
To make the case for your venture's projected valuation at the time
of exit, present the following
- A few examples (3-4) of recent acquisitions in your space showing names, valuations, revenues and resulting multiples in each case.
- Show an average, perhaps adjusted for outliers or special cases.
- If acquisitions of companies like yours do not exist (seldom the case) use the closest proxies you can reasonably find
- Using the data above, make a supported claim of your valuation under similar circumstances based on the revenues projected at time of exit
- Calculate the investors’ projected return based on the % of your business that you offer to trade for the desired funding. Note: This simple extrapolation works if you project a single funding event to take you to the exit. If future rounds are contemplated, you have to adjust the analysis for dilution from those events.
- Do not explain the logic in the slide, do that verbally. The slide only summarizes the data the audience needs to follow your explanation.
Marco Messina