Dave’s note: Guest author, David Steakley returns to explain his theory of exit valuations. It’s a short but excellent read…
By David Steakley
You may recall that earlier in this series, I explained the definition of an inciting incident, using the movie industry and its story telling as the model. The inciting incident in a movie is the event at the beginning of the story that causes the hero’s life to be completely transformed and irrevocably changed, and makes the whole story unfold.
I thought of this in a recent liquidity event in one of my portfolio companies. The company provides identity theft protection, and took a large round from a private equity firm, which returned about eight times investment in cash to the early angels, and still left them with all their stock in the deal, an outstanding result. The CEO did an absolutely masterful job in this transaction. The key to this was: Nothing commands a higher multiple than hope. The company had done very well, growing revenue rapidly, and demonstrating excellent results in several diverse sales channels. It had refined its offerings to the point where its service was the clear market leader. So with that tail wind behind, let’s quickly bring in the freshly minted MBA to calculate the present value of the discounted future cash flows, and cash in!
[Email readers, continue here…] Not so fast. The company had a number of potentially huge, blockbuster deals in progress. No one could say what these deals could be worth, or even whether they would ever be consummated. But, they were clearly mouthwatering. This prospect was what enabled the company to command a multiple of revenue so high that I first thought it had to be a typo. As we often hear, “You don’t sell the steak, you sell the sizzle.”
When you’re selling your company, you have to work hard on your story, and the story doesn’t really begin until the inciting incident.