Choosing and Planning Your Exit Strategy

Across our prior columns, we have been exploring business and product development-related issues specifi – cally revolving around entrepreneurs and start-up initiatives. In this installment, we will review considerations surrounding exit strategy for new entrepreneurs.

Your exit strategy impacts many aspects of your business plan and approach, and not taking this important fact into consideration will certainly impact your future options. It is not a matter of whether you will exit, but of when and how.

The exit strategy needs the consensus of partners and investors as well, which could be a rate-limiting step. You need everyone to agree on the best way forward—whether a sale, an acquisition, a license, partnerships or going it alone—and that it is in the interest of everyone who has put either money or sweat equity in the company. We have all big hopes and, in some cases, we have to make a realistic assessment of any exit opportunities being presented, balanced with the actual chances for a larger, but less likely, future potential exit.

Different People, Different Strategies

For example, if you suggest to your key partners or employees that you have no plans to exit the company in the near term, but then sell within two years of founding it, they are likely to be dissatisfi ed and could disrupt the sale. Or if you want to sell the business in fi ve years but your operating partners want to own and manage it for the next 10, then you will have a problem.

The sooner you start planning your scenarios, the more rewarding the eventual exit is likely to be. Alas that is not a one-sizefi ts-all formula. The range of exit strategies includes taking the company public through an initial public offering; selling the company to a strategic partner; licensing of individual products; or another transaction like private equity. Acquisition is an attractive strategy to many entrepreneurs since another company purchases the business for either cash or stock, or a combination of both. The only issues are whether the acquiring company will retain the old management team and/ or make substantial changes in the acquired company’s operations and staff.

Different people start companies for different reasons, and that can infl uence their exit strategy. Initially everything looks great as the founder(s) own a 100 percent of the business. If they take on investment over time from VCs, angels or individuals, they usually give up a portion of the company or shares. Of course, those shareholders will have a say in any potential exit strategy. A word of caution: Choose them carefully, and ensure partners you will be taking on share overall strategic view for the company and timing of exit. As Eric Young, general partner of Canaan Partners, a global venture capital fi rm that has invested in more than 250 companies in the past two decades said: “Some people want to change the world and that’s why they start a company, and some people just don’t want to work for anyone else.”www.inc.com/guides/2010

Nonetheless, a time will come when you have to make a decision to exit either because you need operating cash or because you have reached a point where you will have created enough value and enough buzz to be acquired. Or you may be faced with a situation to exit to return the invested capital, or a positive respectable double return, versus going the distance for larger returns however with higher risk.

Part of your decision will depend on whether or not you want to continue to manage your business. In an IPO this may not be an issue as you and your team generally play much the same roles before and after the transaction; however, in an acquisition, the acquiring company may replace you and your team with their own team or you may be playing the same roles but within a new structure. In such a case the old adage of having too many cooks in the kitchen may apply.

As a founder and business owner, I (MJR) can only testify that it is not an easy decision but one that has to be made when it is necessary. It is an excellent solution for companies like mine who were struggling with the fact that the funds that were necessary to move the programs forward were not raised in due time, or due to a lack of interest, or a bad market. So we all want a planned exit but it is not always planned ahead.

Common Scenarios

As we work with early-stage entrepreneurs and companies, we see a few common scenarios that arise in which the full amount of needed funding is not raised, or some other consideration alters the originally planned exit pathway:

  1. The story was too long. Having a tight story is the key. Addressing this mainly to new entrepreneurs, we see many companies that have a slide deck that surpasses 30 or 40 slides and they get into too much detail for an introductory meeting. Have a different level of presentations for the introductory (many times non-confi dential) versus the followup discussions held under a confi dentiality agreement. Advice to readers: Ultimately, the point of your fi rst meeting is not to close a deal but to get a second meeting.

  2. The story is incomplete. Make sure the slide deck hits the key areas: product profi le; how it fi lls an unmet need; market and product landscape; differentiating factors of the product; development plan; regulatory plan; budget; risks and how they’re being addressed; operational plan (internal and leveraging external resources like contract research organizations); and a model to project sales.

    On the clinical side you’ll need: FDAacceptable endpoints; what builds value and informs Phase III designs; competing trials (e.g., with orphan indications, how many trials of the same indication across competing products can the fi eld take at once?); whether the proof of concept will be with non-FDA-acceptable endpoints, such as structural endpoints in some retinal diseases; how you’ll build the story that informs decision making; and to make sure to accurately represent in your plan what is acceptable for Phase III. We frequently see initial slide decks talk about proof-of-concept endpoints that can be accepted for Phase III, when in fact they can’t from a regulatory perspective. Have your facts straight and be direct about the proof-of-concept approach. Otherwise it may lose credibility. Of course, you want the slide deck to tell a story and not have big holes in the thought process. We have seen times when an entrepreneur may be so excited about a particular aspect of the program that the combination of these critical elements is lost in the initial pitch.

  3. Targeting the wrong investors. CEOs and founders believe in their companies and often think that everyone else should as well. Most successful investors already have a clear idea about what stage they want to invest in, the novelty of the opportunity and the type of deal presented. It’s especially important to adapt, be clear and properly position the priorities of different paths if the technology is a platform play. For example, are you leading with front of the eye or back of the eye? An orphan or a mainstream indication? Are you leveraging repurposing of an existing drug versus pursuing a new chemical entity? The key advice to the new entrepreneur: Target the right audience.

  4. Grant funding. Although this is one of the best ways to raise non-dilutive funding for your business, most of the time grant funding will not by itself by suffi cient to fulfi ll the funding needs. Generally, it is best leveraged to get to the next steps of key work activities. However, we sometimes see entrepreneurs stuck in a process where emphasis on grants de-focuses from development of the business plan, fund raising and developing the exit plan. Advice to readers: Be mindful of time and resources spent on grant funding, and proper focus that the work to be funded will provide key data for future partners.

  5. Not willing to change directions. There are times when your original idea will not stick. The smart entrepreneur is constantly able to adapt, evolve the business plan and be on the prowl for other opportunities to integrate and build out the pipeline portfolio. Advice to readers: Be quick to incorporate feedback, and if needed have a plan and time line for changing direction if the original one doesn’t work.

This is certainly not a comprehensive list, but we hope it highlights some key items we encounter frequently. Keeping these issues in mind will help the new entrepreneur focus on what is going to drive decision-making and value infl ection, and feed into the exit strategy. Your exit strategy affects various directions that you might choose to help your business grow. Not looking at your exit strategy during an early stage might lead you to limit your options for the future. Your basic decision will have two major components: how and when. Whichever strategy you choose and plan in advance will give you the time to do it right and maximize the return.

Dr. Rafii and Mr. Chapin are with the Corporate Development Group at Ora Inc. Ora provides a comprehensive range of full-service product development for developers, including entrepreneurs, start-ups, large pharma, and investors and buyers. Ora offers preclinical and clinical services; clinical-regulatory and product consulting; regulatory submissions integrated with asset, business partnering and fi nancing support in ophthalmology. We welcome comments or questions related to this or other development topics. Please send correspondence to mchapin@oraclinical.com