Cash out your startup – how to improve your odds?

Despite markets being flooded with investments, exits in Southeast Asia have been few and far between. If you are a startup funder or founder, you’re in for a treat.

 

It is a fact that each company has a limited runway – paying for operations cost, office, product development will severely deplete whatever funds you have raised. Even having customers, and being somewhat profitable does not guarantee an exit on the horizon. The situation is way worse for companies who have not turned a profit yet (which are most of the startups in Southeast Asia). Many companies just hope to be completely purchased by another operator who has the cash.

Having connected with many successful founders who exited their companies, here are the top strategies you can adopt; (besides consistently being out there to look for buyers for your company, of course!)

 

1. Maintain sustainable cash flow

Take example of Amazon, the global behemoth of ecommerce. For many years, it did not turn a profit, but yet it managed to continue running its business and growing market share due to smart management of its free cash flow. A very simple example of how to deploy this strategy is to make sure your business gets paid first, and in turn paying your suppliers much later. The cash you have in the bank during this time can be deployed for other activities (or churning interests for you in the bank).

We are currently advising a large Chinese ecommerce platform which is very picky on which investor to take in (they turned down Alibaba for example). One reason for their confidence is indeed the cash flow. They ship direct to customers, and even with COD they get the cash in maximum 14 days (7 days for delivery and 7 days for settlement with COD partner).

Since they are so entrenched in the supply chain – their credit terms with most of their suppliers is 45 days. And their initial focus on data has paid off – that their buying team manages to keep the inventory level minimal. Result, very positive cash flow and strong ability to protect themselves against headwinds.

 

2. Be the undisputed winner in your business category (if possible)

The fact that Lazada received investment from Alibaba was not a fluke. Lazada was then the undisputed leader in the ecommerce space in Southeast Asia. Although it was burning through its investments as fast as it could raise funds, they continued to grow when their competitors remained stagnant or went out of business. This absolutely convinced Alibaba that Lazada was a worthwhile investment, as big boys only invest in what they think are winners, when it costs more to build it themselves.

It is also important to note that the majority of investors shy away from direct competition with the big boys. Therefore it is imperative that to exit, you have no choice but to be the top in your business category. Read here for our recent piece on a startup in Indonesia which failed to raise more funds after investors were spooked by the entry of a larger competitor which was also an investor in the very startup.

 

3. Be quick to manage bad news

It takes a lot of calibre to be able to manage bad news in your industry as quick as possible. Alan Hilburg, the famed crisis management guru said to always move first to “remove the victim”. It basically means to take steps to reduce the emotional noise (often coming from the victim). By removing the emotional part of the crisis, you can then guide the public to think logically. Take for example, the battle between Uber and Grab in Southeast Asia. Every day, there were news that governments around the region wanted to ban their services.

Grab seized the opportunity and got the upperhand by immediately engaging with high level people (policy makers, politicians etc) assuring them that they (Grab) were ready to comply with rules and regulations, and that led to fewer crackdowns on their drivers (versus Uber), which in turn became a game changer for their company – receiving investment from Softbank. Major investors very often shy away from conflicts and controversy, which they regard as a huge risk.

 

4. Evaluate (any) exit opportunity SERIOUSLY & RATIONALLY

We have encountered once in a while (not frequently sadly) founders coming to us, saying, “someone wants to acquire our company, but we want to develop this further.” And we see pundits advising them to “follow your heart, and do not undersell yourself!”. They say, look at Snap, if they sold early the founder would not be where he is now.

Privately, we have been in many conversations where veterans were bitter about their portfolio company: “they should have sold when so and so offered, look at the deep shit they are in now.” Well, our advice is, to sell or not to sell is NOT an emotional decision – it should be a rational decision evaluating too choices: 1) sell it now, get some money that allows you to develop something else with much more confidence; 2) keep it on, hope to build something much bigger but with a lot of risk.

You have to evaluate both options and decide which is the more optimised decision based on the information you have now. One example is a payment company in the region, which turned down an offer to acquired by a big boy. Knowing the team, we know that they considered the option carefully, and decided that the payment licenses they have constitute a barrier of entry and should allow them to grow further before taking an exit opportunity.

Many companies that refuse to sell, however, do not have such barrier they can hold on to or build upon. One Chinese startup in the utilities business, which was valued at US$1.5 billion, refused all the buying offers then, only to be sold to Alibaba two years later at US$200 million. The team knew that big guys were coming for its market share, they just had too much confidence in themselves they can fend off such onslaught. It turned out, they couldn’t.

 

Conclusion

At the end of the day – entrepreneurship is a journey, and selling companies often only marks a milestone rather than the end. Israelis figured this out a while ago – while many complain that there are no unicorns (there are a few) in Israel, there are far more successful, modest but decent exits. Serial entrepreneurs use the exit money to launch their new business, and invest in other entrepreneurs.

The result: a healthy ecosystem that churns out a good stream of startups.