How to build a company with an exit in mind
Geoff Dittrich, founder and managing partner of Ink LLP, gives Vancouver businesses advice on endgames.
For entrepreneurs with a young business, it can be hard to think beyond the day-to-day. Making monthly plans often seems like an impossibility, let alone blueprinting the ultimate trajectory of the company. But given the recent trend of small acquisitions, Geoff Dittrich – founder and managing partner of Ink LLP – suggests B.C.-based tech businesses should begin thinking about exits from the start.
Dittrich’s opinion holds a lot of weight. Not just a business lawyer with multiple years of experience helping companies scale and exit, Dittrich was also an entrepreneur himself. Like many of his staff at Ink, he ran his own startup before turning to law, and understands the issues facing founders.
“Most lawyers have never actually built a business before, which is so interesting, because they’re advising entrepreneurs on how to build theirs,” he tells the Vancouver Tech Journal over coffee. “I always found that really confusing as an entrepreneur, getting all this advice from people that have never done it. We [at Ink] understand those frustrations from clients around, ‘you're slowing deals down’, or ‘this isn't relevant’, or ‘you're-over lawyering.’ It gives us that ability to understand what our clients are actually going through and help them to achieve their goals.”
High-growth companies are the firm’s target clients, and for a good reason. Vancouver has seen an increasing trend of smaller acquisitions. Across the region, there’s been a rise of national and international companies seeking out small-scale teams, buying them, and using the technology and talent to gain a competitive edge. In the past two months alone, for example, Vancouver’s Finn.ai sold to Glia, while local companies Agriforce and Black and White Zebra acquired Manna Nutritional Group and Crozdesk respectively (the Zebra deal was handled by Ink).
With its fast-flowing venture capital and comparatively shorter times to business maturity, tech as an industry allows founders to think from day one about what an exit looks like – an approach that Dittrich recommends. Assessing early which companies could acquire an entrepreneur’s business, and what those companies are searching for, requires execs to build their organization using different metrics than traditional business models.
“The goal is to build a narrative around what would be interesting to buy by our target acquirers, and what they would be looking for,” Dittrich says. “It may not be that they’re looking for great profit margins, because they've got their own fundamentals around how that should be reached. But they're buying you because it's faster and easier and cheaper for them to acquire the market share, or to acquire the user-base, or to acquire the interesting tech that you've worked out, than to do it themselves. It just brings you into the mindset of – and this is something we talk to entrepreneurs about early on – understanding that trajectory, so you're building towards the right things and you're not getting distracted by things that actually don't contribute to your exit, and your valuation on that exit. And they are very different metrics.”
Dittrich suggests it’s important to think about these fundamentals across every stage of growth. The four main categories he focuses on are establishing, financing, scaling, and exiting the businesses he works with – but that final one, he says, plays into each of the others. The way Ink helps establish the organization’s governance structures aids in accelerating growth, so founders can exit the way that they’d like, and control the narrative. Every contract that’s negotiated and signed, for example, is considered carefully, as it might affect the due diligence process of the exit.
There are multiple strategies available to companies building with an exit as their endgame. Entrepreneurs can plan toward acquisition by a single organization, or focus on the types of companies they think might be interested. The company can be sold not just to entities who align with the business, but also to competitors who are looking to take their rivals out of the market.
“There are different categories of acquirers, and we would want to canvas them out; at least to know the categories,” Dittrich says. “It'd be helpful to have some names to attach to each category, so that the founder can actually fixate a little bit on what that would look like. They need to track those companies over the years. What are they looking for? How are they changing their strategy? How does that align with your ambitions? It helps guide things a little more, and make something that seems so abstract at the beginning – and so far out – become tangible, so that you can actually build around [it].”
Acquisitions are, of course, not the only exit strategy available to founders. Many entrepreneurs start their companies dreaming of an IPO. Dittrich, however, points out that more often than not, this ideal is unrealistic. When running a private company, CEOs are able to focus on their operational product: what most are invested in building. After going public, founders must maintain their operational product, but also develop and grow a capital product. That capital product takes an enormous amount of effort to sustain, and requires constant attention to build a public narrative of good news that will impress shareholders. Going public too early can be a death-knell: markets can be so demanding that a company can’t keep up with expectations, and its stock price craters.
“There’s a lot of sad stories that make it a very uninspiring path forward, unless you have the level of […] business maturity,” Dittrich says. “Like a Hootsuite, which we see running that cycle of ‘Do we IPO? Do we not IPO?’ Those types of businesses are at a scale where they could actually support the public markets and what they would demand.”
Luckily, tech entrepreneurs looking to exit by acquisition are in a good position. With the rise of digital importance during the pandemic, investment grew, and lots of funds raised an enormous amount of capital. That money was deployed quickly, and tech companies expanded fast. At the same time, the influx of cash delayed exit times, because with more capital and higher valuations, businesses were able to build for longer toward a bigger exit.
“That's been really interesting,” he says of tech companies' extended runways. “And with that additional capital, we're also seeing where the seed round has become the new Series A – where seed financings are now in the many millions. Right out of the gate, with not a lot going on, sometimes. It's just extraordinary. And that has allowed a huge amount of growth, obviously, but it's allowed companies to also think strategically about how they grow their company. That’s why we’ve seen these micro-exits, or micro-acquisitions, where even startups are in the money to acquire other companies.”
Over the past few months, the landscape has shifted again, with rising inflation and a slowdown of venture capital investment. Building with an exit in mind, however, remains a good strategy for Vancouver and B.C.-based startups. Stocked with a large percentage of small- and medium-sized companies, and specialized knowledge in industries as diverse as clean hydrogen fuels to Web3, local companies’ talent and expertise remains attractive to international buyers doubling down on their profit margins. As investment begins to dry up, acquisition remains an opportunity for businesses to continue to grow.
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