Very few startups exit in a public offering. Only 19 companies went public in the first nine months of 2020. COVID may have had some effects, but there were only 159 IPOs in 2019 and 160 in 2018 (Note 1).

Forty five percent of my high-tech clients (Note 2) exited their companies by selling to a larger organization. They all offered solutions to real problems, talked to customers early and built products that customers could validate quickly. Those who built a growing, sustainable, transparent business, with a focused strategy had the highest valuation. They were ready to exit when the opportunity emerged.
Preparing for an exit from the start requires focus on key customers, repeatable bookings, a verifiable business forecast, financial transparency, and an early connection with a good investment banker. These are the same factors that reduce the need for outside investment and help founders keep more of their company’s value.
Key customers count.
The potential acquirer will want to know the type of customers buying your products. Closing sophisticated, well known customers suggests that you have a viable solution for that particular market segment. This indicates your ability to convert strategic prospects into customers.
It is common to welcome every potential customer during the start-up stage, but some customers are more valuable than others in terms of a small company’s credibility. Many acquirers feel that a small company is more legitimate when large customers are investing in their products. Customers who can provide sales expansion and become references in their industry are the most prized. Make a target account list and pursue them.
Acquire the right type of revenue.
Sales volume helps to set valuation, but non-repeatable sales, such as custom and service deals are usually discounted when determining the company’s value. Customers with repeat business potential for existing products help the acquirer to project future bookings.
Avoid customization for a single customer. Create product options or upgrades only if new product features offer additional sales volume from the general market. It is counter intuitive to turn down business in the early stages, but the development resources, future maintenance, testing, and support requirements can affect a small company’s ability to grow. Many acquirers know this and will discount custom and service business for valuation purposes. Focus on the core products to increase valuation.
Maintain accurate business forecasting.
Sales forecasting helps to record business activity, track progress, and anticipate future sales. Updating individual business opportunities with the sales team is essential. Regular forecast reviews reveal patterns and uncover problems with product, positioning, pricing, and sales productivity. Demand a forecast from every salesperson and update it weekly.
An acquirer may want to verify the sales forecast to make sure you are “on-top” of your business. A good forecast inspires confidence in your sales projections. I have had a potential acquirer insist on speaking to some of the forecasted prospects with specific questions about the opportunity to do business together. An acquirer may also want to see how well previous forecasts track to actual sales.
Keep clear financials.
A common mistake in the early days of a private company is loosely adhering to accounting practices. This may seem like an advantage in the beginning, but it can quickly turn against the founders when the time comes to exit the company.
I advise my clients to run their finances as if they were already a public company. I have found that this lends credibility, which translates into valuation at the time of exit. Having to restate or explain numbers can affect confidence and make an acquirer look deeper into other areas during due diligence. Lost trust can delay and even unravel an otherwise good deal.
Keep your accounts clean from day one.
Engage early with an investment banker.
Most startup companies are focused on building and not exiting. It is, however, advisable to begin looking for an investment banker before you need one. The right investment banker (Note 3) will strive to understand your goals and position your company based on the overall value to potential acquirers.
An investment banker who knows the industry and has a long-term perspective for their clients can advise you on ways to increase your valuation. Finding an investment banker who will build a long-term relationship with you and be on the lookout for potential exit opportunities is well worth your time.
Plan a profitable exit from the start.
Technology M&A markets can turn very quickly. Planning your exit early will help guide product development, customer focus, sales forecasts, and financials in ways that increase valuation. An investment banker who knows you and your market, can provide a first-mover advantage to you as soon as an opportunity arises.
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Notations:
1. https://www.statista.com/statistics/270290/number-of-ipos-in-the-us-since-1999/ Statista offers insights and facts across 170 industries and more than 150 countries.
2. https://inregion.com/clients In Region Inc. offers strategic and operational advice for entrepreneurs, founders, and c-level executives to achieve maximum revenue growth.
3. https://www.harvestmp.com/ Harvest Management Partners provides unique M&A services for technology companies. They have a long term perspective and have successfully completed dozens of mergers and acquisitions.