Overcoming the Exit Taboo: How to Win the Startup End Game

Spotlight Article By Marc Martin-Casas, Touraj Parang & Mostafa Ronaghi

A few weeks ago, Illumina Accelerator hosted serial entrepreneurs, Touraj Parang and Mostafa Ronaghi, for a fireside chat focused on startup exit strategies. Touraj recently published a book called Exit Path: How to Win the Startup End Game, in which he details how startups can most optimally prepare for potential M&A outcomes from their early stages.

Below, we summarized the key takeaways from that conversation. These are expanded on in Exit Path and are based on Touraj’s decades-long experience building and advising companies with successful exits.

Acquisitions are at an all-time high, yet startups devote little to no time planning for them

There are about 40,000 acquisitions annually. Last year was an all-time record, and there is no reason to believe that this trend will not continue. Despite the lack of clarity on where the market is going, this is different from the 2008 financial crisis in that lenders are currently active, VCs have dry powder, and big pharma have cash to engage in M&A activity.

An acquisition is the most likely success scenario for entrepreneurs. It is common knowledge that most startups do not “make it” — but of those that do, there are 30 M&A transactions per IPO. Despite this, according to a survey included in the book, founders spend little to no time thinking about and/or planning for exits.

It is tough for a startup to go the distance alone — especially in the life sciences. Courting and collaborating with strategic allies can be instrumental to ensuring that a biotech startup’s innovations see the light of day, as well as to increase company’s value upon an IPO or an acquisition.

Exit planning ahead of time, whilst balancing limited resources, is key

Planning exits ahead of time might seem counterintuitive to some, as small early-stage startups are always bandwidth and resource constrained. The answer to this skepticism is balance — while spending 100% of a startup’s time on exit planning is ill advised, so is devoting only a couple of hours planning for a startup’s most likely outcome.

Optionality begets leverage — the worst time to sell a company is when you have no alternative. Creating strategic options from the early stages of a startup helps prevent a desperate fire-sale situation as well as enables you to react from a strong negotiation position to any inbound acquisition inquiries. Building strategic relationships and building optionality early will lead to better outcomes for any given startup — even if the eventual outcome is not an acquisition but a private financing event or an IPO.

In his book, Touraj provides practical guidance both when an acquisition is far into the future (which he refers to as playing the “long game”) as well as situations where a sale is expected within a 12-month time horizon (the “short game”):

• Long game: When playing the long game, the goal should be to build momentum towards building capabilities, team, exit strategy and networking with strategic partners. There is a need for trust and confidence building with potential acquirers, which requires consistent human interaction.
• Short game: This can be very time consuming and distracting to the near-term goals of the company, so it is important to surround yourself with competent lawyers and advisors, and to have clarity around the purpose and risk/benefit around the transaction.

When considering acquisition prospects, one must think of the overall strategic goal of why a startup was founded in the first place. What is the startup’s founding mission? What are its core strengths? What might a potential acquirer find value in? And what would make an acquirer desirable? Answering these questions provides strategic clarity that will add value to a startup regardless of whether the company eventually decides to sell to an acquirer or not.

When negotiating with potential strategic partners or acquirers, prioritize the relationship over valuation and deal terms

Valuation, although essential, is not the sole metric most founders consider when weighing an M&A offer. Mission alignment, culture compatibility, and integration plans are all critical considerations that will impact whether a particular acquisition is a desirable outcome for the key stakeholders of any startup.

A way to ensure this is to deeply diligence and vet the acquirer by building a long-term relationship that extends beyond the BD or corporate development deal teams. This can be done formally, as part of a broader partnership, or informally, as regular touchpoints with potential acquirer’s key decision makers.

Exit planning and entrepreneurial commitment should not be seen as mutually exclusive

Talking about exit strategy has been a controversial and taboo topic, as it can be perceived to signal a lack of commitment of entrepreneurs to the long-term vision of their startups. As such, investors are often hesitant to engage in exit conversations and founders are encouraged not to discuss exit strategies openly. But an open and honest dialogue between entrepreneurs and their key stakeholders is vital to creating and executing on a winning exit strategy. The way out of this predicament is for entrepreneurs to set the proper context and overcome this taboo by clarifying why having an exit strategy helps them better execute on their core mission.

Key takeaways:

• Start early
• Build genuine relationships over time
• Don’t ignore the possibility of an exit
• Optionality begets leverage
• Have clarity on your startup’s mission, vision, and values
• Tap into the experience and insights of those who have travelled this path

About Illumina For Startups

Illumina For Startups is focused solely on creating an innovation ecosystem for the genomics industry by partnering with leading venture capital investors and entrepreneurs to create, launch, and grow genomics startups. Illumina for Startups initiatives include Illumina Accelerator, founded in 2014, and Sequoia Capital China Intelligent Healthcare Genomics Incubator, Powered by Illumina, launched in Fall 2021. Illumina Accelerator is a company creation engine co-located with Illumina research and development sites in San Francisco Bay Area and Cambridge, UK. Illumina Accelerator has invested in 74 genomics startups from across the globe, which have collectively raised over $1B in venture capital funding. For more information, visit our website.