Identify All Possible Exits
William J. Link, Co-founder, Versant Ventures
After founding and building two companies, American Medical Optics and Chiron Vision, both under the auspices of major corporations, I became a venture capitalist working with companies to help them build profitable ventures. These experiences have led me to believe completely in identifying potential exit strategies at the onset of a business endeavor.
Of course, this article is written with the understanding that many companies are founded and built as sustainable entities without an exit in sight. An example is a traditional family enterprise that focuses on generating positive cash flow and maintaining a consistent business. These companies are often built to sustain a single owner and to operate in their own right, and do not require an exit strategy.
However, many entrepreneurs want to build a high-growth business and then realize a major financial gain from their investment and that of their shareholders. This process, as all entrepreneurs know, involves endless time, substantial money and a strong vision. These entrepreneurs are people who might even want to do it all over again once they have taken their company public or sold it to another entity. It is for these types of enterprises that an exit strategy is essential.
Based on my 23 years of experience before entering venture capital, I have learned that building a business for a smooth exit involves four stages. The initial step is to reverse the plan, think exit first and then plan and organize accordingly. Next, place the exit strategy on the shelf and focus on building the business. Then, garner visibility through marketing, a process that I call "getting in the path of progress." Finally, execute on the exit. What follows is an examination of each of these stages.
Stage One: Reverse the Plan, Think Exit First
An exit strategy, in my opinion, is one of the most important aspects of starting a business because it gives you, the entrepreneur, a focus for your efforts and allows you to set up your entrepreneurial endeavor with the end in mind. It also allows you to clearly communicate your goals and expectations to your team and investors.
When I founded Chiron Vision, a company focusing on ophthalmic surgical products primarily for cataract and refractive surgery, in 1986, my team and I wrote a plan that included all of the steps we intended to take, including research and development, product development, FDA approval processes and marketing strategies. Having already been involved in numerous other entrepreneurial efforts, we also knew that we should research and plan exit strategies.
After careful due diligence, we determined two roads of exit for Chiron Vision. One was for us to be acquired by one of about five corporate leaders we had identified, and the other for us to sell stock to the public in an initial public offering. Either option gave us a clear objective for the business and established, in writing, the financial rewards we hoped to accomplish by following all the proper steps in building a viable company.
Why did we build two exit strategies for Chiron Vision? The reason we chose to plan for both options in our business plan is because a single exit strategy is risky - you can't control where the market will be in five or 10 years. You can only control the quality of your product or service. Options are what can make or break a successful exit strategy, so we made sure that our options, and therefore opportunities, were solid and robust.
Stage Two: Place Exit on the Shelf, Focus on Filling a Market Gap
By building Chiron Vision with two potential exit paths in mind, we made sure that our business would be of interest to the capital market as well as a potential buyer. All solid business plans carefully assess the target market. However, having an exit strategy forces you to consider what your competitors are already doing and could do better. By taking market research one step further, we designed a company that met and filled a market gap - in our case, products for refractive surgery - left by the very companies we were thinking could buy us one day.
With the exit strategy in place, I put it on the shelf and focused on building the best company I could for the first eight years of operation. You don't want to go out to potential buyers before you have demonstrated the value of your product. Sometimes moving too quickly can actually diminish your chances of acquisition because the potential buyers get nervous about your haste in contacting them.
To make sure we had something they would like to buy when we were ready to offer the business, we focused on product development, FDA approvals to prove market viability, and growing a strong sales and marketing team to make Chiron Vision profitable and well positioned for the future.
Stage Three: Get in the Path of Progress Via Marketing
It is at the marketing level that a company begins to get on the radar of potential buyers - and when they begin to see your potential. This is what I call getting "in the path of progress" of potential acquirers, and it is essential in executing the exit strategy. As with having two options for our potential exit strategy, we had multiple options for potential buyers for the company.
To continue along the path of acquisition, I carefully researched the corporate leaders in the market and began to make Chiron Vision even more visible by attending trade shows and conferences. I also contacted them directly to introduce our business strategy and the success Chiron Vision had already achieved in the market.
I also nurtured relationships with the industry's investment bankers, who not only take companies public, but also often act as an intermediary between the two parties involved in an acquisition: entrepreneur and buyer. Building these relationships involves personal meetings and participating in investment conferences sponsored by leading banks.
Stage Four: Execute on the Exit Plan
When, in 1997, it came time to determine which exit path to take a number of strong companies were interested in Chiron Vision and the IPO market was fairly weak. Thus, we determined that the best option would be to aggressively solicit offers from the top companies that showed interest in buying us. This allowed us to maximize the return on the investment in the company. Had an acceptable offer not been forthcoming, we remained committed to pursuing an IPO.
When considering the possibility of being acquired, aside from looking at the monetary price of acquisition, it is important to find a good home for the company, its customers and employees. Selling a carefully built enterprise involves more than purely financial decisions - it involves finding a company where your business has a good chance of being successful. When considering buyers for Chiron Vision, I reviewed the companies' underlying cultures, because if there had been a dramatic clash after the acquisition, the perceived value of our work would have been diminished.
In the end, Bausch & Lomb, a global eye care company that had made a strategic decision to enter the ophthalmic surgical field and saw the potential for the products we developed, acquired Chiron Vision. Bausch & Lomb had annual revenues of about $2 billion, and we were a good fit for their needs, both on business and cultural levels. This was an ideal outcome for my management team, my corporate partner, Chiron Corporation, and me. It also inspired me to pursue my current passion for working in venture capital to build more companies in the eye care and medical device industry that will truly make a difference in people's lives.
Now, at Versant Ventures, a venture capital firm that I founded with several partners in 1999 and that focuses exclusively on early-stage healthcare companies, I work with entrepreneurs every day to help them build better businesses with an end in sight and tangible goals to focus on along the way. By ensuring they all have an exit strategy I not only protect Versant Ventures' share of the companies but also help the entrepreneurs realize their greatest financial goals.