Here is How You Guard Your Precious Startup

During exits, founders must be on their toes
A few months ago, the founders of Pune-based startup, Clarice Technologies, declined an acquisition offer from one of India’s poster-child startup unicorns.The reason?
This unicorn thought it was valued at over $3 billion, but the investors (of course) seconded that and offered what according to them was a lucrative deal. But the founders of Clarice were unconvinced; they did their checks and came to the conclusion that the potential acquirer’s stocks could not be worth more than $1 billion. And so, they moved on, leaving the unicorn wondering how a tiny startup could ignore its allure.

Clarice’s founders were showing foresight and pragmatism.But amid all that’s playing out these days–fancy valuations, massive funding rounds–there are not too many with these qualities.

To understand how much these inflated stock deals are spreading like a disease, you only have to look at the acquisitive ecommerce companies. Companies such as Flipkart, Snapdeal and several others are gobbling smaller startups on a regular basis. They are offering “lucrative“ stock deals, and are finding there are many willing entrepreneurs who are taking anything coming their way .

Entrepreneurs love exits, and investors love them too.

After all, successful exits are tough to come by , and if you do get one, chances are that you will get funding for the next startup fairly easy , and at a premium valuation. Ditto for investors. Exits under the belt always help raise more funds.

And overall, exits are always celebrated. But the reality is that many of these “exits“ are increasingly deals involving “inflated stocks.“ In some cases, even `acqui-hiring’ is being celebrated as an exit, which is completely flawed, but at least it in volves good cash, even if it’s not very much.

But entrepreneurs must remember that by agreeing to the acquirer’s valuation of its own stock, they are also tying their fortunes to the prospects of that company . So, if a Snapdeal or a Flipkart hits a rough patch, and their valuations come down, the startup founder’s “fortunes“ will also take a beating.

It always helps to speak with serial entrepreneurs who have sold their companies, and understand how to ensure a stock deal that’s more grounded. Another metric is to look at massive funding rounds of the acquirer, and watch closely if the incumbent investors are participating in the successive funding rounds. If an acquirer is being valued purely based on the potential seen by its existing investors, then it surely needs a reality check. A fresh investor will always question status quo, bring new metric to arrive at a valuation.

There are very few examples of deals that involve realistic stock valuations these days. Common investors in startups doing M&A too need to be blamed for this growing bubble.

Slowly , but steadily , a chain of such transactions with inflated stocks is spreading. If a bubble bursts, it will take down not just these large unicorns, but several others with it.

Source: The Economic Times

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Author:

Neeraj; an entrepreneur & a visionary in the field of Railway, Defense & Automobiles, is a graduate in commerce and a Harvard Business School Alumni. He’s an expert in govt. liasoning & contracting and has an exceptional network & connections at both local as well as global level. He’s an expert in Market Strategy & Planning and has served number of overseas companies as an advisor/consultant. He takes a profound interest in upcoming startups & is very receptive towards ground-breaking ideas & innovations. He likes to brainstorm those ideas and if the values & philosophies matches; he is even ready to invest his resources, serve as a mentor or act as an incubator to futuristic businesses.

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