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Anonymous Exits - Pt. 1

Updated: Nov 30, 2023


It’s a sunny Tuesday morning in London. I’ve just arrived at a café near Waterloo and I’m pleased to see a smiling, exited founder. They arrived first - I suppose they now have time on their hands…?


Welcome to the first in our series of ‘Anonymous Exits’.


In our Anonymous Exit series, we meet founders that have exited their Edtech business.


We want to make sure it’s as useful for you as possible, with founders being as honest as they feel appropriate- so it’s anonymous. We will talk with founders that exited at a range of valuations in a range of Edtech verticals.


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Theme: a smooth exit


Key takeaways for a smooth exit:

  1. Keep your options open as much as possible so that you have choices available- run a dual track option if appropriate, exploring opportunities to raise a further round as well as exit opportunities with acquirors and other partners

  2. Appoint advisors in your process to guide you and help you build your decision frameworks, as well to source and screen prospective acquirors

  3. Define your clear red lines before you kick off your process so you can point to them as a reference point during negotiations and make it easier for you to hold your ground

  4. Confirm you and your co-founders are on the same page from the outset so that you can present a smooth, united front when negotiations begin rather than deciding once offers are on the table

  5. Optimise for deliverability as well as other sexier details like valuation, to give yourselves the best chance of getting the deal done rather than it collapsing because there is a long chain of events because it can be finalised

  6. Explore progression opportunities for your team when negotiating - you want to be able to communicate good news to your team so be sure to advocate as appropriate so that as many people as possible win from the deal!

  7. Consider how the exit process would work from early on, particularly when setting up your options pool, to ensure the smoothest possible exits that can be handled by you, the executives, as much as possible.


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1. Introduction


Us: So, you’ve exited. Congratulations! Could you indicate the valuation?


a. $0-10M

b. $10-20M

c. $20-40M

d. $40-100M

e. $100-500M

f. $500+M


This was a similar order of magnitude to the valuation in our previous funding round and maybe 20% down on what we think it could have been the previous year. In the market conditions, only being down 20% suggests we had good timing!


Us: Nice! How are you feeling about it now?


The overriding feeling is validation that we were building something that mattered and that could become a successful business.


It has given me time to reflect on the Edtech industry.


As most readers will know, building in Edtech is hard, particularly if you are wanting to build within formal education institutions.


It’s also pretty damn hard to build a unicorn - in Edtech, particularly when selling to schools, it can be even harder. This is one of the reasons I chose to be very cautious and measured in my approach to taking on private investment until we were in a sound position and we could avoid the need to be as ‘boom or bust’ as some VC investments. For context, we first took VC money when we were generating ~$2m ARR and had reached profitability.


It's worth stressing that every journey and every decision is individual- founders have varied relationships with the problem they're solving. For us, we had been committed to our problem for a long time before raising, hence our more cautious approach. Other founders would have taken different actions.


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2. Taking on VC investment


Us: And how are you feeling about having taken on VC investment, with the benefit of hindsight?


I feel very positively given the way it has turned out!


But of course, there were moments that felt a little more ‘boom or bust’ than I’d have liked. For example, we nearly bankrupted the business in our efforts to keep growing at a VC rate. As other founders will know, doubling ARR at $500k is much easier than doubling revenue at $5m. We all write nice slides on market size but the truth is that there are lots of market segments- we often don’t segment these figures too much in our decks because we don’t want to appear ‘under ambitious’.


For this reason, we opted for investors that we thought might be willing to tolerate steadier growth. We wanted their support to help us function smoothly and efficiently in our home market before expanding. We didn’t have education-specific VCs but we did try to choose those that knew something about it – we wanted them to understand how our model would work, how it would scale, and why there might be challenges along the way.


On a related note, we weren’t particularly inclined to raise at a comical valuation and then need to crawl back for more funding because we had overspent. I’m sure this would be music to our VCs ears but perhaps we were a little conservative. I think the balance of appropriate risk levels is different in each company.


We preferred to be low risk before trying to take investment, with a view to raising when we decided it was time to try and ramp up activity.


Us: Could you give us an example of when/how you and your investors weren’t on the same page?


Entering new international markets – the issue was not that we were being pushed to expand internationally, more that we were being pulled in too many directions, trying to expand to too many markets at once. We ended up doing an okay job in several, but not well enough to really double down on the investments. We had to be honest with ourselves about the market share we could reasonably expect to achieve in the new markets.


Us: Were there times that you were more bullish than your investors?


We tended to be more bullish than investors in cases of asymmetric insights- for example, we had a strong hypothesis that growth fuelled by concerted upselling efforts would work for us while investors doubted this hypothesis. Fortunately, we were right!


Us: Why were you more bullish on this?


We were more confident because we knew the customers well and we thought upsell would give us a better outcome than channelling efforts into new sales. This was based on customer feedback regarding their pain points - we remained nimble to their pain points and developed accordingly.



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3. Angling for an exit


Us: Were you angling for an exit by the time it happened?

We were certainly angling for something… We either had to raise more or exit, but we didn’t really want to start muddling along. In the end, with both of these possibilities on our minds, we ran a dual track option. We got offers on both sides - exits and funding. This made it quite a stark decision, with significant choices available. For the first time, an exit was a real possibility. There were varied opinions amongst our board - for example, even amongst our existing investors, some wanted to put more money in and others wanted to take money out, largely dictated by their own fund positions and timings.


Us: Did acquirors come to you?


We decided to appoint advisors to run a process from the outset. They secured several offers. Interestingly, despite appointing advisors, the offer we eventually accepted actually came from outside the process. We had been talking with the acquiror about a partnership for a little while and they discovered we were running this process and decided to make an offer.


Us: How much variation was there between the offered deals?


Everyone always focuses on valuation because it’s the most sexy aspect of the deal but it’s not all that meaningful because structures can be so different.


In our case, PE options tended to have significant equity roll components so might be worth more in the longer term, but had a different risk profile. Other options wanted to acquire us alongside raising money or acquiring others. This would have been quite complex - of course, it could be interesting, but it also made us beholden to a necessary chain of events that needed to happen before we could finalise the deal.


Us: How did you decide which option to choose?


We optimised for deliverability as much as valuation. By deliverability, we mean the chain point mentioned previously. How many things need to go right for it to close? There is so much that needs to happen before it’s all signed and delivered, so it’s important to consider how you can make this chain as simple as possible. Don’t get me wrong - many of the other offers were very interesting and exciting with more fulfilling roles as carrots in the process, but a lot of stars needed to align to make it happen. You don’t want to have zero control over important aspects of the process.


In the case of other investors, we simply weren’t convinced they had the money they proposed. And we had been burned by this before. These investors wanted to acquire us via an SPV. We had a similar event in our B round- when it came to signatures, the SPV backed out saying they hadn’t managed to get the money together. The whole company nearly collapsed in this case, so we learned our lesson…


Us: How did you manage this process with regards to your co-founders?


We received higher and lower valuations than the one we accepted.


Upon reflection, I think one of the things we did particularly well was that we were very clear on our red lines from the outset. A lot of people do a lot of posturing in the process. But we preferred to keep our red lines around the terms that we wanted. For example, from day 1, there was an amount of risk-free cash that we wanted and if we couldn’t get that, we weren’t going to take the deal. We decided on an amount at which we didn’t necessarily feel like we ‘needed’ more, so beyond that level, we were content to have more risky options.


It was very helpful that my co-founders and I were on the same page on this and our other red lines- it’s ultimately helpful for the acquiror too, as it makes their calculus easier when it comes to handling other aspects of the deal, like our roles in the combined entity.


We spent a lot of time trying to tease out the red lines- if you have this from the early phases, it makes the optimisation process a lot more straightforward.


Us: Did you lead the optimisation process?


We did take the lead because we were the ones that needed to deliver it, live it and front it to employees and clients.


Us: How different were final terms to the starting point?


The acquisition terms matched the letter of intent, but in places, that letter of intent was intentionally ambiguous to give space to negotiate.


Us: To be more specific on your individual terms, what was the split between cash, equity and other key buckets?


As mentioned, we had the red line on cash. We wanted ‘X’, risk-free, upfront. And then we decided to split the remaining cash value between cash that’s dependent on how things work out in the acquisition as well as a chunk of equity. We opted for ~1/3 in each.


We wanted to guarantee that in the worst possible outcome, where equity goes to zero, I’d secured the life I want.


Us: How long was the period of appointing advisors to closing and offers to closing?


The period from deciding to appoint advisors and closing the deal was around a year. The period from kicking off a serious process to close was ~6 months. And the period from signing the letter of intent to close was ~3 months (but it was meant to be 6 weeks!).


Us: Casting your mind back to before your process started, were there terms in your previous rounds that could have better prepared you for exit?


I would honestly say no - we of course didn’t do everything perfectly, but nothing that caused significant, deal-changing issues in the process.


This said, there were certainly things I wish we had done around the time of our rounds. For example, we should have sorted out our options in more detail- it took a lot of time to get to the bottom of how to deal with them. The question of how and when to communicate how options would function ended up driving our entire comms plan which wasn’t ideal! If I could go back, I’d think harder about the mechanics of the process which didn’t require us chasing signatures from a range of people, including ex-employees.


There are other points relating to insurance and legal risks that many founders tend to overlook. When we look at legal agreements, we tend to take a risk assessment approach. There’s always a theoretical risk, but if we judge it to be low, then we would be willing to take it. But a lawyer’s perspective is different- they tend to be less able to assess and accept a risk and simply need to judge what would happen if it all went wrong. There were things we could have done to make this process smoother and lower the sense of risk. For example, we could have formed specific carve-outs for acquisitions - this would have been sensible. But naturally, we weren’t optimising for those terms when making decisions in previous agreements.



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4. The Transition


Us: How did you feel when handing over the reins to new partners during and following the acquisition?


Quite honestly, I expected it to be harder to let go.


But I think I was ready and I think the business was ready to move to the next level.


On more specific functions, I assumed I would be semi-unwilling or perhaps just less willing to let go of things but I’ve actually found it fine. I was and am actually quite happy for people to take over decisions, so long as I feel confident that they will make good decisions - I do feel confident that our acquirors are the right people to lead our business into its next frontier. I think I’d feel differently if I didn’t trust our acquirors to do right by our people and our product.


On a related note, I think founders have a choice in this process between requesting a higher price or more control. I found myself feeling increasingly pleased by the idea of handing it over…


This was partially because I have the belief that acquisitions should be able to create more value than the sum of the parts. This can only happen if the integration takes place properly.

Us: You mention a sense of relief and being pleased to hand over the reins. Would you have considered handing them over to someone already in your team?


I think being a successful founder requires a varied skillset. You need to be able to react to uncertainty and be able to do new things at the drop of a hat. Early stage founders are adding colossal value. They simply need to try and get the businesses to a point where they can hire people much better than them to do things much better than the founders first attempt.


To keep a record of some of these wild and unexpected tasks, I used to keep a done list. It’s fun to look back at the list, think how far we’ve come and realise that those issues are now a thing of the past- they’re either totally solved or someone else has responsibility and does a great job. And these were things that at the time could kill you!


Once you’ve got a first version and can begin to hire people, your role as the CEO evolves. Your job is to set out a vision and align people behind it, create an environment in which it can materialise and not.run.out.of.money.


Us: Regarding your role in the business moving forward, what did you agree to?


I agreed to do 2 years and if I leave before then, I’d leave money on the table.


To me, part of the point of an exit is to enable change. I like the idea of a change.


Us: Turning to your employees, how did you go about presenting the acquisition to them?


One of the things we did optimise for was ensuring was can genuinely give good news to the team. We wanted to make sure that as many jobs were safe as possible and that we created progression pathways for those deserving of big opportunities, such as global leadership roles in combined teams. This was a very satisfying part of the process. This aspect is interesting as we can’t really enforce or make these make-or-break terms in the deal, but we just needed to look the acquiring team in the eye and take their word. So far, they’ve stuck by their word.


Us: What did this process of negotiating the roles of your employees look like in practice? Did you go person by person?


We went person-by-person. But we didn’t give them access to our people, so a lot of this had to be done on trust. A successful exit is built on trust on both sides, so you eventually trust each other’s judgements!


Us: Naturally, there must have been people that did not benefit. How did you handle this?


We did push as hard as we could for each employee’s circumstances to be as clear as possible. For example, companies only need one CFO so it’s quite typical that the CFO of the acquired business is off-boarded in the process. Our CFO was aware of the process throughout - we needed to make sure he did a good job in the process so we provided some good incentives. We came to similar arrangements with other team members.


Us: Are you selling clients on how positive it is for your partnership with them?


With regard to our clients, we optimised for a seamless transition to their new overarching provider, to the point where they wouldn’t notice a difference. We didn’t want to have lots of frustrated clients. This also informed how we selected the acquiror- we wanted them to add value to our clients, not reduce value.



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5. Looking backwards and forwards


Us: What were the most difficult moments?


There were plenty of times we were concerned it wouldn’t happen but suspect it’s par for the course. We felt that we needed to be willing for it to not happen from the outset. Acquirors can smell fear! It’s important to try not to sell when you need to sell and to sell when you are between two minds.


Sometimes the most awkward moments were between us as a founding team and our investors. Some terms could be fine for our investors but not for us. It can be a little awkward! It could be relating to earnout stuff and how easy/ hard it would be to achieve. Naturally, investors don’t care too much about this part as it often doesn’t affect them. But it’s helpful to be able to say: ‘look, 6 months ago, we agreed that this was a red line so we expect it to be respected!’. This stance isn’t unreasonable.


Other times, we felt like we were reaching an impasse. This often related to risk. An example is our warranties and indemnities- in theory, people don’t want to be on the hook for certain risks, but then if you are personally prepared to be responsible for something you consider to be extremely low risk, then you can break the impasse with a reasonable confidence that the risk won’t materialise. In these cases, other things then need rebalancing to respect the risk you’ve taken as the point person for the risk. This sounds a little like we decided it on the fly- we didn’t, it’s important to note that! We had a framework that we used to express different models that could help all parties achieve their relative preferred outcome. Our advisors did a great job of helping form this framework.


Us: And a final question, what did you buy when the cash was wired?


I listened to a few podcasts on what to do when you come into money. I landed on a talk by a pilot – he was explaining that a key piece of advice for pilots in emergencies is sit on your hands, pause and think, and then act. The vast majority of the time, you should have time to pause, take stock, get control of your emotions and then make reasoned, rational decisions and respond rather than react. To be frank, I also haven’t really had time. I’ve been busy professionally and personally so I’ve sub-consciously sat on my hands!


I’m typically on the more cautious end of the risk spectrum- you could argue we missed out on things we could have achieved, we could have gone for death or glory, 10x or bust, but we decided to keep 2x-ing, set a reasonable risk level and then deliver on our plan. Your approach to risk is often dictated by how wedded you are to your problem. In our case, it was something we’d been working on for a decade - so we prioritised more certainty for the business. I don’t have many regrets about that approach.



Us: Thank you for your honesty!


You’re welcome.


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The (exited) founder loped off into the bustling city.







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