When taking on venture capital, your job as an entrepreneur is to build a company that can return that capital (and then some) to investors. Sure, there are a lot of other responsibilities that come with building a startup, but this is a big one. And it shouldn’t be taken lightly. But, how does an entrepreneur go about that?
Recently, on our podcast, we interviewed Mason Levy, a CanopyBoulder alumni, former employee and successful entrepreneur, about his own experience preparing to sell his company, WeGrow, before focusing full-time on his other venture, Swivl. The interview became one of the top listened to episodes we’ve done to date so we’re highlighting the major takeaways. (Click here to listen to the full interview on our podcast here if you want).
Lesson 1: Clarity is king
As mentioned above, the job of an entrepreneur that takes on venture capital is to return that investment. And while it’s often hard to know what that will look like exactly, it’s something worth keeping in the back of your mind as you engage with customers, investors and, perhaps most importantly, partners. The opportunity will likely present itself when the timing is right (so be on your best behavior).
This lesson extends to understanding your own personal goals as well. Before beginning the process, get with your team and iron out what is important and where you would all like to be on the other side. At the end of the day, exiting inevitably means compromise so be sure every fork in the road is viewed through the lens of your long term goals.
Lesson 2: Be ready to communicate and compromise
If you walk away from a deal feeling like you got everything you ever wanted, you’re doing it wrong. This is why lesson 1 is so important. You have to know what to let go of and what to hang on tightly to. But beyond that, you also need to know how to communicate that information and how to understand the other sides’ goals.
The process of acquisition usually starts with a NDA which allows both sides to begin sharing assets and information so that a value can begin to be reached. Then, it turns into a Letter of Intent (LOI), where both sides detail what they want out of the deal. Keep in mind, the strongest position you will have as the entrepreneur is at the time of signing the LOI. Do yourself a favor and iron out all the details in the LOI to make the final negotiations and closing go relatively smoothly. You do not want to run into major obstacles after an LOI because they will be harder to work through.
Setting up a LOI is also a great way to gage the seriousness of your partner. Are they responding to the LOI? Adding input? Or just ignoring it? This will begin to paint a picture of what a deal would look like with this entity.
Lesson 3: Exiting is a team sport
There are plenty of ways to start talks of acquisition. Some entrepreneurs opt to engage an investment banker who can help make the right connections and negotiate the deal, but who also will take a cut. For other entrepreneurs, they opt to take the challenge on themselves. Regardless, having the right people in place is key. When beginning talks, be sure you’re engaging your trusted mentors and advisors, especially those who have been there before.
Beyond advisors and mentors, be sure to engage your lawyer. I know, I know… I feel like I’m quite literally always advocating for lawyers but in situations involving complicated language and binding agreements, having someone familiar with the process in your corner is key. The last thing you want to do is accidentally (or not accidentally) agree to something that will come back to bite you. Listen to our podcast episode on preparing for exits from a legal standpoint.
Another helpful resource is accountants who can do the same but for your numbers. Listen to our podcast episode on preparing for exits from a financial standpoint.
Lesson 4: Valuing your baby is tricky
Building a company from scratch takes blood, sweat and tears (this is not a metaphor). All of that has to be taken into account and have a dollar amount applied to it. Start by detailing each aspect of the business - is there data? Tech? IP? Innovation? Assign a high- and low-end dollar amount to each and you’ll start to see a picture of the total value of the company.
It’s also important to note here that you need to be as objective as possible. Your company is likely your baby but, just like real babies, it may not be as beautiful as you think it is (sorry!). Try to use outsider eyes when valuing the business.
The cannabis industry is heating up and acquisitions and exits seem to be popping up all around us. And for many entrepreneurs, that is the ultimate goal, so we hope these tips help prepare you. Good luck!!
