Besides taking a brief time out to celebrate the Expertcity deal, I have spent a fair amount of time interviewing VP candidates for one of my portfolio companies. As with any smart executive who cares about the value of equity, the question I am often asked is, "What is your exit strategy." My answer is quite simple-every company we invest in must have IPO potential (IPO potential as defined by non-bubble metrics) but along the way if someone makes an offer for the company because it is an attractive, rapid growth business, we can evaluate it appropriately. What we will not do is invest for the sole purpose of having a company acquired. That is a losing proposition. The ultimate way to create value is to have a real business with real cash flow and a strong balance sheet where you can show your potential acquirer that you do not need any other sources of funding besides self-sustaining growth. VMWare certainly used this approach when it decided to sell to EMC. You have to be able to show your potential acquirer that they are not the only way to create liquidity for your business.
Companies are bought and not sold. What I mean by that is good exits usually happen when someone tries to buy your company rather than you trying to sell your company. In other words, these good exits usually happen when your company is approached by a potential buyer-i.e., you are seen as desirable in someone else's eyes rather than you telling someone how pretty you are. Typically, these types of exits result from already existing, revenue-generating business relationships. It is not that big of a leap for an aquirer to make an acquisition offer on the higher end of a valuation range knowing how its partner does business, how the management teams work together, and how the product sells through to its customers. Other times it can happen when your company consistently beats out a competitor in the market and is seen as a thorn in the side. In either case, your company is a known quantity and the potential acquirer has seen you perform in the market.
What does this all mean? My advice to entrepreneurs and management is quite simple: if you focus on what you can control (growing and managing your business), then the external factors (exit strategy) will take care of itself. However, if you try to force it and shop your company, that shows a sign of weakness and more often than not will result in a fire sale. Remember, companies are bought and not sold. If you do not get the price you want, it will not matter since you have a business built for the long-term. For a strong, well manged company, opportunities will always present themselves.