Raising Entrepreneurial Capital

Chapter 8

Executing the Exit Strategy

CHAPTER GOALS

This chapter is a case study in the details of implementing an exit strategy.

It is a continuation of the New Tech case that we have followed through

earlier chapters. Since the entire chapter is case material, it can be omitted

without loss of continuity.

The primary learning objective is to better understand, by illustration, the

process of finding an investor and finalizing a deal. Hazards exist at every

step along the way. This process involves a degree of preparation that is

often underestimated.

CASE 8.1 NEW TECH (K): FINDING COMPATIBLE

INVESTORS

With the investment proposal nearing completion, New Tech must now

identify potential invest ors. But where to start?

Stuart Chip (New Tech’s CEO) calls Grant Argent (New Tech’s financial

advisor) for a meeting with Elizabeth Pratt (New Tech’s in-house ac-

countant) and himself. Grant explains that there are different categories of

investors: angel investors, institutional investors, venture capital firms,

labor-sponsored venture funds, government-backed corporations such as

the Business Development Bank of Canada, and so forth. Each investor

has investment preferences, making some more attractive than others.

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Grant emphasizes that it is critical to ensure that the potential investor

matches New Tech’s priorities an d objectives. Stuart indicates the crit eria he

feels are important in selecting an investor who will be compatible with New

Tech’s needs.

New Tech’s Criteria for Investors:

Capital required As calculated in previous steps, New Tech needs $1.575

million, but of that it needs $600,000 in venture capital.

Industry experience New Tech would prefer an investor with knowledge of

the computer industry.

Geography The closer the investor, the better, especially because New Tech

is looking for an active investor.

Stage of development New Tech is looking for an investor who is com-

fortable funding the expansion plans of an established, profitable company.

Level and type of involvement An active investor would be preferred, given

the weaknesses revealed in this area in New Tech’s management review.

New Tech would ben efit from an active investor with experience in fast-

growing businesses.

Commitment and staying power The investor has to be committed until the

next round of financing, if necessary.

Chemistry The investor has to be someone with whom the management

team can work easily.

Elizabeth Pratt consults with Tony Lee of Smith & Smith, New Tech’s

lawyers, to determine if there are any exemptions in the securities the com-

pany could qualify for and how this would affect its investor contact program.

KEY TASKS

To identify appropriate investors, New Tech must:

. determine its criteria (as it did earlier)

. draw up a short list of possible investors

. rank and assess them to see which investors match its needs

. pick its top choices

THE CHALLENGE:BUILDING A SHORT LIST

. Whom should New Tech consider?

. How can the company find prospects?

New Tech relies on its financial advisor to identify prospective investors

and build a short list that it can review. Using Stuart’s criteria, Grant does

an extensive search based on his contacts and various databases. He

268 Executing the Exit Strategy

subsequently presents Stuart and Elizabeth with a list of nine potential

investors. Grant informs Stuart and Elizabeth that he has dealt with most

of them and knows their reputations and past investment deals.

He indicates that he has included a couple of passive investors. He feels

Stuart might benefit from meeting with a passive investor just to see the

difference in management style, since it is his first experience with the

process. Grant also adds that it is not unusual for a syndicated deal to

take place when an active investor joins a passive investor who trusts his

or her business acumen.

The investors that Grant suggests are:

Two individual investors

. Walter Buffet

. George Van der Meer

Three private venture capital funds

. Pine Capital

. Van-Hong Ventures

. Chinook Ventures

Two labor-sponsored venture funds

. Fond de Montre

´

al

. Equal Opportunity Fund

Two institutional investo rs

. Big Chartered Bank Capital Corporation

. Bank of Kelowna Capi tal Corporation

THE CHALLENGE:RANKING POSSIBLE INVESTORS

Grant, Stuart, and Elizabeth have a 3-hour discussion about the pros and

cons of the nine potential investors. At some points during the discussion,

Stuart wonders whether Grant is sensitive enough to his investor criteria.

However, they soon turn to consider some interesting possibilities.

EVALUATION OF INVESTORS

George Van der Meer

Grant knows George Van der Meer personally and says he is a very astut e

investor who has successfully exited from most of his investments in

the recent initial public offering (IPO) market. He is looking for new invest-

ment opportunities in which he could be actively involved. However, Stuart

Executing the Exit Strategy 269