planning your exit: how and why some studios get bought | james kosta

Planning Your ExitHow and Why Some Studios Get Bought

James KostaOperating Partner

Signia Venture Partners

Make ‘Exiting’ Part Of Your Startup PlanPaid-In Capital

• Are Founders ‘investing’ in the company with money or time?• Did Founders bring equipment or IP into the Company?• Does the Company truly own everything?

Make ‘Exiting’ Part Of Your Startup PlanHuman Resources

• Do Founders know how to hire and delegate?• Is Employees’ work product legally owned?• Flat org charts feel great, but can’t scale.

Make ‘Exiting’ Part Of Your Startup Plan• Focus

• Is the Company going to be tech, IP or consumer focused?• Trim the ‘fat’.• Build vs. Buy: Does it add value?

Why Are Some Studios Worth So Much?• Users are your single greatest asset.• Understanding them multiplies value.• Sell pre-launch = lower risk.• Sell post-launch = Better have TRACTION!

How Studio Valuations Are Calculated(LTV * # Users) + (20% * Payroll/yr) + (X Factor)

X Factor can be:• IP value• Acceleration of development• Opportunity cost• Value to competitor

Attracting Investment Capital and PartnersPartners:

• How much are your users worth at your competitors’ LTV?• How attractive would your IP be to competitors’ in-network users?• What tech have you developed that can enhance a competitors’ LTV?

Your LTV$

Your Marketin

gYour IP

Their LTV$$$

Their Marketin

gYour IP

Attracting Investment Capital and PartnersInvestors:

• Focus shows in hiring, operations and community management.• Depth of Board• Fair valuation• LTV has been optimized• Can it scale?

Evaluating an OfferUse a third-party advocate/consultant to assist and advise.

• Can say things you can’t.• Should be connected into the M&A community.• Plausible deniability

Evaluating an OfferTips:

• Don’t over-negotiate or negotiate by red-line.• Use the phone or meet in person.• Despite rumors: Investors and Partners don’t want to beat you down.

Win-Win FTW• Retention• Holdbacks• Earn-outs• Control of IP Litigation• Indemnity

Barriers to Execution• Invention Disclosure/Ownership• Open-Source Licenses• Retention• Potential Litigation

Summing It All UpBuild your company in a way that makes sense.Start with the mega-scale. Work backwards.Spend time on your HR documents. Be reasonable but firm.Get to know your competitors. Take comfort in your shared challenges.Don’t build a xenophobic/nepotistic Board.Set milestones and HIT THEM! Publish them to create urgency.Check your ego when negotiating. No one owes you anything.