In muted IPO market, OTPP’s venture growth team talks exit alternatives

The muted IPO market has created a backlog of companies looking to make their public debut. In the current climate, a strategic and meaningful exit option for founders and CEOs can be M&A, so argue executives from Ontario Teachers’ Pension Plan’s venture capital allocation.

In a bid to support portfolio companies in Teachers’ Venture Growth (TGV) allocation the pension fund convened a discussion led by TVG’s John-Christian Bourque, Shannon Bailey and Yvonne Wassenaar to discuss how founders and CEOs can optimise their exit. Their key advise focused on building optionality early, establishing strategic relationships, and managing a successful sale process.

The 45-person team in TVG’s allocation manages around $7.5 billion. Initial direct investment range from $50-$250 million focused on late-stage venture and growth equity investments in cutting-edge technology companies. Recent investments include Fleet Space Technologies, Australia’s leading space exploration company, and Mintifi, India’s leading supply chain financing platform. Strategy is shaped beyond simply investing to partner with portfolio companies to create opportunities and achieve the best outcome together.

The trio discussed the importance of founders building optionality early.

“Creating optionality should start as your business nears $25 million ARR, not when challenges arise. Building optionality involves making your business adaptable and building trusted industry relationships to avoid a pressured sale down the road,” they said.

They also sounded the importance of start-ups investing in strategic relationships. Founders often hesitate to connect with bankers and private equity firms unless they have immediate plans for a sale. However, establishing these relationships early provides insights into market trends and better positions a business for an eventual exit.

Founders should also broaden their viewpoint.

“Understand how others view your industry and where they see value in your company’s approach. Engaging bankers can help you understand the valuation landscape, even if you’re not immediately considering a sale,” they said.

Allow ample time for the process

A successful sale takes time.  Preparing for this empowers entrepreneurs to manage expectations, ensure needed runway and avoid weakened negotiation positions.  This is critical given the challenging fund-raising market and regulatory environment.

They advised founders on the importance of scenario planning and developing potential exit scenarios. Always consider the opportunity cost of your decisions. Time is incredibly valuable, and cash is no longer free, they said, advising that founders understand the different pay outs to key shareholders at different valuation points.

Next the venture team advised firms on the importance of strategically engaging their team. This comprises minimizing the number of people who are involved in any process to avoid leaks and distraction. They advised on the importance of helping those involved understand the sale phases and guide them in balancing the process with running the business. If you might need to exit at a depressed valuation, consider a management carveout plan to ensure retention of essential executives through deal close.

Set the table for success

They said to remember that a deal is not done until the money is in the bank.  Sales processes can be exhausting and easily tilted by seemingly minor issues, such as cultural fit. Moreover, merger agreements tend to be long and incredibly nuanced.  “Work to proactively manage cultural fit and augment your team with experienced outside advisors,” they said, listing key areas to think about.

The importance of culture alignment: Leaders prioritize cultural fit when buying companies.  Identify and clearly highlight your company’s cultural strengths. Aligned values will strengthen the deal’s viability and support post-close success.

Surround yourself with experienced advisors: There is a lot to be negotiated in a sale process beyond price.  Potential acquirers likely will have more experience than you on how to tilt terms and definitions to their advantage.  Be sure you have experienced advisors to help you strengthen your negotiations and avoid unexpected surprises.

Every founder aims to leave a lasting impact on their industry and create meaningful value for their team and investors. Leaders who actively manage the factors within their control achieve the best outcomes.