Episode transcript:

M.K.:
Last week we were talking about scalability.

A.R.:
Yes.

M.K.:
And this week is principle number six in the series, and this is a series of six. So this is the final principle. And what is that principle? I think it’s exit, right?

A.R.:
It is exit. I mentioned that last week when we were talking about the scalability and the six criteria is is the exits from the from the investment. Okay.

M.K.:
So so tell me more. Tell me about exit and tell me more.

A.R.:
Well, I could easily say this is one of the least two. This is one of the topics that I see less of the time when I’m looking at investor presentations. Maybe because it may it may not feel so good to say, well, here is a great investment. Here’s what we’re offering here is opportunity and here’s how we are going to leave.

A.R.:
I can certainly understand that sentiment. But as an investor, it’s one of the most important criterias for me, because it is the it is the only way that I’m going to make an exit is the only way that I’m going to make out of an investment. I’m not going to make money on my investments from from the revenue from the profits of the company.

A.R.:
I will need an exit strategy to be able to make to get my money back, preferably with a in a in a higher amount than I invested. And that an exit is the only way to do that. That’s on the way to make money.

M.K.:
So so when you talk when you say this word exit, are you talking about me as the entrepreneur, my exit, or are you talking about the exit, not the potential investor.

A.R.:
I’m talking about my exit as investor. Now, as I mentioned before, my goal in investing and I’m going to talk about what some of the exit possibilities are, but before that, I’m going to say my goal when investing in a startup is not to remain a permanent shareholder or part of the company. What I want to do is to multiply the investment that I’m going to make today at a future date and and take it back.

A.R.:
And exit is the only way when when that happens. Of course, when I say exit, let me clarify what I’m talking about. There are there are different ways of exiting a startup. Well, the the most common the way of exiting from a startup is through a bankruptcy. Well, they the the project fails or the startup dies. And as an investor you just have to accept, accept that and continue your life.

A.R.:
The only thing that you can maybe receive as a return from that investment is experience. Not not one single cent you get zero, but you get experience. And and it is pretty common, by the way. I mean, it’s not something that you can avoid as an investor, but that’s not the goal. Of course. The goal is to be able to multiply or to replicate or, you know, get five times more return on my investment at the future date.

A.R.:
And for that, there are there are three main exits possibilities. Now, the first one is, for example, future rounds of investment. Let’s say I invest in a company during seed stage and and then the company goes on to a series A or B or C in the future, in the future stages as company grows. So during those rounds for example, investors with bigger pockets who are coming onto the table, they may look at the current cap table, they may say, Well, there are so many small time investors like like this guy, so we’re going to buy his shares, we’re going to pay him a premium.

A.R.:
We’re going to pay a lot more money than he invested. So we’re going to buy his shares. They may want to clean the cap table, the ownership of the company. Okay. So in that case, I can I can negotiate a the sale of my of my shares in the company at the price, preferably higher than, of course, what I paid before and exit the company.

A.R.:
That’s the end of the road for me for for me as an investor in this project. But my my I sell my shares and get out another way. And other exit possibility is the occurrence of a trade sale. For example, in this case another company or a group of investors, let’s say they want to buy the entire company and let’s say they want to incorporate them into into their their portfolio or their operations.

A.R.:
So in that in that case, my shares, as well as all the other small investors, all of them are purchased by this new a new entrant into the into the company. And depending on the negotiations, this can be pretty lucrative. This can be okay. But I don’t think I’m not sure if it would be at a loss. So that would be the second way of exiting a company.

A.R.:
Again, end of the road for my participation in this company. Yeah. And the third, which makes the most air ways around the world, is the company grows so much that eventually they they go onto they go on to an IPO, then they’re we’re not talking about twice, three times or four times returns. We’re talking about 100 times or in the times.

A.R.:
If we’re talking about those those. That’s why they make the airways. That’s why you hear about those. But the thing is, this is such a rare occurrence statistically, I don’t have any statistics, but we hear about them because they make big news. But at the end of the day, they’re not they’re not that common.

M.K.:
Okay. So I can see, you know, if if I’m an investor or I’m not in I’m the entrepreneur. I’m the entrepreneur and I’m making a paycheck, I can see, okay, well, if I’ve got a represent my exit plan, then that’s one slide deck. But wouldn’t wouldn’t every single slide.

A.R.:
I mean, your exit as entrepreneurs.

M.K.:
Yeah, but wouldn’t every if I’m making I’m making a slide deck or my slide deck for the potential investors, the exit part of that slide deck needs to it doesn’t it need to be different for every potential investor? Doesn’t every potential investor have a different exit plan?

A.R.:
Well, I’m not sure if an exit plan is something that the investor can have, because when I invest in a company, for example, just because I am a business angel participating in that company, it doesn’t give me any right or possibility of controlling a future, a liquidity event. They are called liquidity event. So sure, those are the the events that I can exit.

A.R.:
But I’ll come back to the first part of your question. And I don’t think as an entrepreneur, as I don’t think as an investor, looking at an investor pitch, I would want to see the entrepreneur talking about, Well, here’s how I’m going to exit. They exit this process. No, I think I think I think the exits slide or the parts relating to the exits should revolve around how the potential investor may see himself or herself exiting the company.

A.R.:
One thing I wouldn’t want to see the founder of the project seeing in two years amount. So you you’re left by yourself. And in that regard, like I mentioned, all the way out in the beginning, not only do I not see a lot of mistakes in about the exit, in the presentations, I don’t see them at all. Like I mentioned, maybe because entrepreneurs don’t want to talk about, yes, we want you on the project and you will be out in the future, but everybody knows that’s error.

A.R.:
I mean, the the founders know that. The investors know that. I, I, I don’t remember from whom I heard, but there was this beautiful saying, beautiful phrase I heard investing like signing the investment agreement for a startup is like signing the wedding agreement, but at the same time signing the divorce papers, you know that there will be a divorce at a certain point in time.

A.R.:
It can be messy, it can be very messy, it can be very lucrative. But it’s like we are signing an investment agreement for participating in the company now with the full understanding that we will exit in the future. So there is nothing to hide about this.

M.K.:
So if everybody knows that there’s nothing to hide, everybody knows that the investors exit at some point. If everybody knows this, why do you think that more pitch decks aren’t including this?

A.R.:
I honestly don’t know. And maybe they may be thinking that, well, this is something we will consider in the future. But if I’m looking at a project for the first time and if I only have a couple of minutes to to hear from you, I wouldn’t mind at the end of the presentation, maybe talking about this was a project, this was a team, this was a value and everything.

A.R.:
Everything, everything. But at the end of it, if you choose to participate, here is how we envision, of course, without any guarantees, that in the future there could be a additional rounds of investments. There is this huge company in the markets that may be interested in buying us or, you know, some some projections into the future. Of course, it’s very difficult to predict what’s going to happen in two years, three years or five years time, but at least I wouldn’t mind actually, I would want to see it would give me I will want to see something about the exit, because it would give me the idea of going through the future projections well enough to

A.R.:
be able to say yes. Exit is one of the possibilities that you can have in the future. And and we have considered that and here is the information or that that we want to share with you. So without any guarantees, no one can guarantee that, of course.

M.K.:
So if I’m the I’m the entrepreneur and I’m making a pitch and I want to have a section in that deck about exit potential exit, should I maybe should I have a timeline that says here is liquidity event number one, Liquidity event number two, number three, number four. And they’ll come every couple of years or every five years or something like that.

M.K.:
Should I have a time like a type of potential projected timeline of liquidity events? Is that how I should do it?

A.R.:
I don’t think so, because no one can estimate or predict the timing of future liquidity events. They can happen. They can they may they may happen. They may not happen. Okay. But in sort of a timeline, I would recommend putting scenarios. Okay. Like without without giving without giving a timeline, Here’s where we are in the investments we have finished Pre-seed.

A.R.:
Now we’re looking at seed investments. And the next step that we envision would be a series A you can say something like, I don’t know, 12 to 24 months or 36 months without without being very specific about that. And again, maybe some idea about a future evaluation based on the data that you can project from today. But with full disclosure that none of this is guaranteed, none of this is promised.

A.R.:
This is just some idea to give the to give to the investors about how they may envision themselves exiting from the investment. Okay. So of course, they are not they are not obligated to I mean, depending on the conditions of the future rounds A, they wouldn’t be pushed out of the company, but they may take advantage of the liquidity event.

M.K.:
Yeah. So Okay. So one more question. We’re running out of time, so we have time for one more question. So if I’m going this route, I’m an investor and I’m making a pitch deck and I’m going this route of what you just described, should I also.

A.R.:
Encourage certain enterprise that.

M.K.:
I’m the entrepreneur and the.

A.R.:
Entrepreneur? Okay, okay.

M.K.:
And so I’m the entrepreneur and I’m making a pitch deck as I’m describing these potential steps. You know, in a few years we might have a Series A and then in a few years after that, maybe we have a Series B or something like that. So I’ve got I’ve got a slide and I’ve got some some foreseen steps, and I’m putting in there a big disclaimer that this is a projection to the future.

M.K.:
And this is just what I think might happen. We’re not sure. No, nobody can be sure about it. So I’ve got I’ve got my disclaimers in there. I also put in there something like the big business building events that are the milestones that are going to accompany that, like for example, before Series B, we’re going to enter a new market segment and start selling to grocery store chains or something like that before Series A, We’re going to, I don’t know, get a company wide CRM from SAP or something like that.

M.K.:
So should I mentioned some operational milestones in there too?

A.R.:
Well, if you’re not giving guarantees because then you would be obligated to fulfill them. Yes. Okay. I, I could I could see them going onto the slide. But about the disclaimers, especially about the big disclaimer, maybe level necessary, you can include that in your talking points and everybody comes to the to the to the meeting or the or the presentation with full knowledge that these are especially when talking about the future, these are predictions or projections.

A.R.:
As you may say something, this is how we envision this is how we forecast a future liquidity event. Of course, there are there are no guarantees. So since it’s not a legally binding document, I don’t think you will be required to include disclaimers in that. I mean, everybody knows that you’re talking about your forecasting the future and there are no guarantees.

M.K.:
Yeah. So we’ve got to wrap this up. So before we go, this series of of six principles, it was inspired by a mentor of yours in Barcelona. Tell me tell me about who that person is.

A.R.:
Yes. My third and so is is my mentor here. And I have learned so much from him in terms of entrepreneurs, investment startup investments or the entrepreneur ecosystem. By the way, I just realized I’m not going to be finished with these six criteria as stealing from him and sharing on this podcast. I just realized there are so many other things that I want to take and, and, and, and shared in this podcast.

A.R.:
So we’re going to keep on mentioning his name a lot in the future episodes still. Okay. These yes, these six criterias he he actually has a YouTube channel in which he has this series about the six criteria. So we will include them in the show notes to links. And I highly recommend anyone interested in the topic to to connect with him and follow him.

M.K.:
Okay. And on the YouTube back to the YouTube videos. So this this episode today about liquidity events and exits this episode about exits is there like a specific YouTube video just about exits?

A.R.:
Yes. Oh, wow. Yes. There are specific videos about these six criteria that that we talked in this in these recent episodes. And we are including the direct links to those specific videos in every episode. So with the show notes on this one, you can find his video about specific talking specifically about the exit.

M.K.:
Okay. And those links will be in the show notes then. Yes. All right. So thank you very much, Alper, and I’ll talk to you next week.

A.R.:
Always a pleasure. Take care.

M.K.:
Bye bye.