Executing the Exit Strategy
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
CASE 8.1 NEW TECH (K): FINDING COMPATIBLE
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.
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
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-
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.
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
. 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