Welcome to the second 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: Exit timing reflects founders’ perspectives on life
A less brisk morning for this second edition of Anonymous Exits. Instead, a virtual call. It’s 1 minute to 12. The zoom room is launched. The exited founder has entered the call. Connecting to audio…the ellipsis repeats on loop for a few seconds before a smiling face appears the other end.
Hello!
How are you?
What’s the weather like in…?
We’ve not spoken before.
Thank you very much for doing this.
Etc.
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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
It was a good exit. We were pleased with the outcome. We were ready to sell…
Us: Excellent, this leads us onto our first question. You exited having not raised a Series C. This feels quite early for a company selling for >$500M. Could you tell us about how the exit came about?
We had a somewhat unusual Series B. In our Series B, a fund bought the majority of the company, slightly more than 50%. To us, this felt like a partial exit at the time.
By the time of the final exit, we knew that it was the right time. We didn’t want to take the company public, raise more money or start acquiring companies.
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The Series B offered us a chance to take the company to a new level, with the firepower and direction of the fund partner.
When the pandemic started, we were able to ride the wave and saw a huge acceleration in our demand. Even though by that time we were a little tired, we were excited to see the product doing well, growing and heading in a positive direction. This said, we did realise that we didn’t want to try and take the company all the way to IPO. So, we began considering our options, including finding a strategic buyer.
Our first step was to hire a bank to source and manage the sale. This included some PE options with an education specialism and some generalists.
We weren’t overly choosey about our preferred acquiror, being honest. We trusted that any acquiror would want to make the best of the business and make sure it complemented their view of the world and hopefully help as many learners as possible.
Fortunately, all the partners internally as well as externally, including our investors, were aligned in the desired timing of the exit.
With hindsight, it was a great time to sell. We sold when the markets were strong. Indeed, we actually had a couple of offers higher than the one we accepted- one was 50% higher than the one we accepted but it came with a significant equity component which we weren’t keen on – we much preferred the idea of getting the deal done and ending ties with the company. It was ready to fly the nest. This meant getting a cash deal done with no earnout and few peripheral terms.
By the time the deal was signed, I had resigned from the board and exited operations.
Interestingly, I was the only co-founder still involved in the day to day running of the company, with a CEO we appointed in partnership with the fund holding that post through the transition.
Us: When you hired the investment bank, was their remit to find you the best buyer?
Our terms with the bank were fairly standard.
We knew we had an asset that was growing with great NPS. So, finding a buyer should be straightforward enough in the context of other companies seeking an exit!
Our main question to the bank was: which companies could buy us?
We preferred the idea of the purchaser being a strategic acquiror, buying us for the synergies with the business. Given the broad relevance of our products, we knew there were several buckets of possible acquirors.
For the buyer that eventually did acquire us, it made total sense for them to have a product like ours, capable of generating significant synergies with their existing products.
We wanted the process to be as quick and efficient as possible – we were lucky that our previous rounds had been quick. For example, during our B round we had been talking to a global household name tech company regarding an acquisition but then the fund acted very quickly and nimbly and we were able to agree terms.
Us: You mentioned alternative offers when discussing how you shifted from Series B to exit. Could you tell us a bit about these offers?
We had several offers on the table throughout the company’s journey, so we were used to considering these options.
One of the offers that was higher than the one we accepted was from a big, big player. As I mentioned, this offer was 50% higher than the one we accepted.
Though these decisions have implications on a large number of people – you, your team, your customers, your acquiror’s senior team, their employees, their customers – it’s ultimately the decision of a few people. These people, like everyone, have moments and situations in their lives to which they respond.
By the time of exit, I was clearly a little older than when I started. My priorities had evolved. I valued flexibility, freedom, time…
Maybe if I was younger, I would have continued. Maybe if I was younger, I would have still had the burning ambition required to continue and keep growing the company and competing. Maybe if I was younger, I would have wanted even more money.
But if you make a few million dollars…do you really need more? What do you need it for? In some ways, I think it’s preferable to have less money beyond a certain point – it creates a whole new dimension of problems. The point for your series is that your approach to exiting will depend on your values and what you want in life. The decision to exit is situational. This is why I don’t really have regrets- because in each case where we faced a decision, we made the best decision for us at that time, even if it didn’t always work out perfectly or optimally in the longer run.
In my case, I have more than I need.
I have a house with my family and then I have a day house that I built for myself to work from, because I don’t like the idea of working at home. I want the separation. The exit gave me the space to have this separation.
In my house, I have a room dedicated to the business we built that gave us what we have – it has our original documentation and other items relating to our early days. I like to remember how far we have come and I still feel proud now when I go to that room. It helps me realise that I did something. I’m proud of it and I’m extra proud when I look at the product because it’s (still) so f****** good. It was a fun ride for all of us.
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We were also aware that it could all fall down at any time.
It's funny because, like other founders, I worried for years that Google or Microsoft would put a team of engineers in place to replicate our products.
Another way it could have collapsed is via an unseen legal issue. For example, we had a teacher go to the legislator to complain that our content didn’t meet certain standards, but of course it did – we prided ourselves on high quality content. This could have really unravelled on us had it gotten more traction, with lawsuits from employees and users…
This is to say that at a certain point, you just feel relieved to have it all sewn up.
Being a CEO is a never-ending series of worries about everything that’s happening in and to your business.
This is why we prioritised a smooth, clean exit from the company. The money was good, more than good enough for us. Some people would argue that we left money on the table but it was our decision and it’s not something we regret.
I came from a background where high earnings weren’t an expectation. One of my friends worked for a bank and made $10k per month. I told him “when I make $10k per month, I’m done, I’ve made it.” Money is one of those strange things that fluctuates in value depending on how much you have… it can either never be enough or you can settle. It also, of course, depends on who is around you and what you collectively prioritise.
Us: Did you seek a clean exit because you knew what you wanted to do next, or was it a case of simply wanting the freedom?
It was more the latter.
I am still searching for my next impact project…
I would like to spend my time and energy creating something good for society.
I don’t want to spend time on things that are not meaningful to me. This is one of the reasons why I spend my time mentoring, talking to younger people, helping them to come to the right decisions for their lives, in work and personal matters.
I don’t think I’d want to go and develop something within the education system. I’m far more into the f*** you-type approach, that looks at the systems, observes that they don’t work and then works something out that cuts out the system and still delivers public good.
The other reasons a startup no longer really appeals is the workload and pressure – half of each day in my current life is spent doing things I love and I’m not prepared to give it up! The idea of having to raise money, hire people, foster all the conditions for the company to be successful makes me feel exhausted…!
I also think the ways of the world are different now to how they were when we founded our company. For example, I have a bit of a problem with remote working. In our company, I believe that people genuinely loved to work for the company and loved the people, loved the team and loved being in the office. The office dynamic was so energetic, so dynamic and so positive. All of that is lost if you don’t have a central office. I wouldn’t know how to build a great company remotely without the culture that an office allows you to cultivate.
I’ve always been fond of motivating people and finding ways to help them to be the best they can be. An example from our early days was when a guy on our customer success team was a little down- I asked him the issue. It turned out his car had broken down with expensive fixes meaning it was taking him ages to get to work on public transport. I said ‘if I sort you a car, are your problems fixed?’. He said ‘yes’, so I sorted him a rental car and he was back flying again.
Sometimes the team mistook this kindness for weakness, but 99% of the time our goodwill was reflected in the commitment and atmosphere of the team. I’m very proud of the culture we built. It’s a nebulous concept that you can take steps to foster but ultimately comes down to the people you hire and the way you treat one another.
Us: Going back to the round in which you decided to sell half the company. What was the thinking with that raise?
Even from our early days, we had a lot of interest in acquiring us. But then they would see our numbers and be less sure! This was when we were making around $1M in ARR. But when we accelerated to $7-8M, we suddenly had considerably more interest.
This acceleration gave us options – we had good margins, deepening traction…
Post our Series B, we were valued at $100M. The offer we received was good and we could see the sense in the involvement of a real player, with the shared objective of making the company successful and achieving a good exit. It made sense in that moment to give up some control and I don’t look back on the decision with regret.
Us: With the benefit of hindsight, how do you feel about having taken the VC route?
We had an interesting funding journey – our rounds included family, angels, VC and PE, before the exit. At each stage, the money that we raised was what we needed at the time, so I’m pleased with the decisions we took. In the moments we took them, we made the right call based on the information we had available.
As we grew and scaled our ambitions with the performance of the company, we knew we needed to raise from VC and PE firms to reach those ambitions.
If you were to ask if I would take VC money again if I started another a company, I would say probably not.
VCs interests can be misaligned with founders’ interests. For example, there was a situation in our company when a VC was telling us to accelerate on all fronts. Whilst an exciting suggestion, it would have been too much for us- we had to be selective. The VC has a portfolio, they have spread bets, they have diverse risks and of course they want you to be a homerun. This is different to the founder perspective. Founders have one shot. They need to prioritise survival and growth in the ways they see fit. From my experience, PE tends to be more aligned with founders because it’s more patient and more focused on maximising efficiency from assets. There is a place for both risk and stable growth – it’s on you as the founder to take a call on this balance.
At some points in the journey of building a company that requires investment, it’s not for you to choose. If you have the chance to raise a series A, then who is going to do it if not VCs? VCs help you through the gap between family and PE, fuelling your fastest accelerations. However, as you progress towards series B or C, then you can begin to consider other funders.
In future projects, if I need a bit of money, I’d rather use my own money.
There are a lot of promises in VCs, particularly around value-add that rarely materialise. Other times it can be incredibly meaningful and I greatly respect VCs that achieve meaningful value-add because it’s so rare! There are sometimes also issues regarding bringing vaguely competing companies into the portfolio - this feels extremely toxic and is a huge turn off to prospective founders.
All of this said, I was delighted to invest in a couple of VCs with new funds. Our relationships were amazing. We managed to finish on the best possible terms with all of our stakeholders. With our employees, our clients, our vendors, and our investors- we treated everyone with the same level of respect and this was reciprocated across the board.
Us: When you signed everything and resigned from the board, how did you prepare the business for exit?
We were able to have a pretty clean exit from the business.
By the time of the exit, the co-founders were no longer running the company. We had hired a CEO and new board members had been appointed. I was not worried about the people running the business because it was firing on all cylinders so they just needed to keep it on track. We also knew that our acquirors did not intend to break up the business or integrate it immediately within its existing suite of solutions, meaning our clients wouldn’t see any changes in performance of contracts. We had guarantees on continuity which we appreciated.
My biggest preparedness contribution came in the first year of the pandemic – by this time the new CEO and CFO had started. They wanted to fire a lot of people when the pandemic started to keep the business steady, particularly acute given that Districts were not sending cheques. We argued hard that we shouldn’t fire people on the basis that the conditions could lead to strong demand for our products. This turned out to be correct and the business turned around within a month. It’s a good job we didn’t ruin company culture or shoot ourselves in the foot before this potentially huge uptick in performance.
Us: From the point of appointing investment banks, how long did the exit process take?
It took a couple of months so it was relatively quick.
This was helped by the fact the PE fund had great relationships and was well networked. Exits as a PE-backed firm become all about relationships. Our fund had incredible connections. We were pleased in this instance to follow their guidance, even if they perhaps did make more money from the deal than they arguably deserved given the relative effort involved!
Us: If another founder was approaching an exit, what advice would you give them on timing?
When considering the timing of a possible exit, a combination of factors go into deciding how and when to exit: personal values, family life, the economy, your health…without even mentioning company performance.
You have to ask yourself: what does the company need to get to the next level? Can you do it? Do you want to do it?
The considerations vary depending on the nature of the exit. If it’s inbound, there’s a good chance it catches you off balance. You’ll see the dollar signs and then you’ll think about what will happen to your baby when the new team is in charge… You then start to think about practicalities… Do I need to stay? If I stay, will the new partner control my life? Do I want this? And this is all before considering the nitty gritty of deal structure, add-ons, earn outs and the rest of it.
If you have an outbound exit, you can expect this process to take considerably longer, around 1 year.
The main thing you can do as a founder is keep your laser focus on execution while running the company, whilst always keeping one eye on the possibility of an exit and making sure you take decisions as you go that you don’t think you will regret when the time (hopefully) eventually comes.
In our case, this meant sorting our IP rights as early as possible, so that they could be acquired cleanly by an acquiror with minimal dependencies. Shortcuts in these processes can feel appealing at the time but they rarely feel like a good idea further down the line! The person doing the diligence process needs to see you have taken the proper steps.
Us: Are there specific terms you wish you’d taken during previous rounds that would have helped?
The first one that comes to mind is finding good lawyers that you like as early as possible, so that you can have a great relationship and lean on them when required, knowing that they will do all they can to help you sort out any issues you encounter.
This goes back to having your stuff in order around IP, as appropriate…
Us: How different were the final terms to the original terms?
The final terms were pretty similar to the first proposed terms, but for a little wiggle in the pricing of the full company. It was all cash, so it was quite a straightforward negotiation. Though we received a range of offers, the one we accepted was the one that best suited us, so we were inclined to make it work.
Us: Looking back at the deal process now, were there any particularly complicated moments during exit?
During the final deal process, no, not really.
But a quick example from a previous funding round arose after our Series B. We hired a COO, with the intention of making them CEO in future. The issue was that they were a manager of managers – they were excellent at it but it wasn’t what we needed and we only realised after the fact. So, I had to fire them. At the same time, we let go of a number of senior leaders because we had become bloated in the senior levels. We needed to do things more nimbly. I realised we had a problem when most team members would be given an instruction and then suggest a meeting…the instruction WAS the meeting! We needed to act more like a startup again.
Us: Our final, potentially crass question… What was the first thing you did when the exit was finalised?
The founders made a trip to a cool place on a private jet and we had an awesome time.
Other than that, I didn’t really do anything…
I already had a nice car. I still have it...
Us: Thank you very much for your time…
A pleasure.
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We wave.
I click ‘Exit meeting’.
I wonder what they’re off to do next…