Exits and beyond …. with Alex Chesterman

We hosted a lunch recently for founders of fast-growing European tech businesses from both inside and out, of our portfolio, with Alex Chesterman, founder and former CEO of ZPG and founder of Cazoo.

Alex told us about starting Zoopla in 2008, the subsequent acquisitions including of PrimeLocation, and then listing ZPG on the London Stock Exchange in 2016 before selling it to US private equity group, Silver Lake Partners in May 2018. Other founders in the room added their own thoughts on successful scaling and exits. Here are some of the takeaways:

“A smaller share of something big, is better than having 100% of nothing”

Successful exits most often come when you’ve reached scale, so if you can see a path to winning, rather than fighting it out, it might be worth attempting to acquire competitors and consolidate the market. Even it means dilution. Alex took this approach with Zoopla and took a market of 20 players down to two. It’s also not always necessary to have a lot capital on the table, as depending on what you can offer and market conditions at the time, acquisitions can be done with paper.

IPO — the ultimate shareholder divorce?

When we speak to founders IPOs often come out as the most desired exit option. Here are some of the benefits of pursuing that route:

  • It creates visibility and noise around the brand and there is often a halo effect which comes from being a public company. This can be particularly helpful for B2C businesses
  • Access to capital markets is a benefit if you are looking at M&A activity
  • An IPO can force you and your business to grow up and plan for the future, for instance creating disaster recover manuals
  • It’s a big milestone with a very positive impact on morale, particularly if you’ve issued options all the way down through the company
  • It provides a natural opportunity for shareholders to go their separate ways

But IPOs also come with costs:

  • Real costs in £££ terms
  • Time costs, particularly for the founders in the lead up and then when reporting
  • Constraints in terms of the things you can do and decide e.g. hiring, pay etc.
  • There is nowhere to hide — everything is published from the business accounts to your salary
  • You can be negatively affected by events not in your control such as the news agenda impacting public markets

What to expect with private equity?

Experience of private equity exits depends on which private equity business you are working with and the alignment of strategy. As a founder it also depends on the trust they have in you as a leader, if you are aligned and they believe in you then they are likely to be more hands-off and let you execute your strategy.

If they believe in the idea, but not you personally, it’s likely to feel more uncomfortable and you are going to have less independence. However, private equity at the right time can also bring a fresh perspective to your business and their input and investment may allow you to scale, develop and mature your organisation.

The strategic option

For some, a strategic buyer may present the most attractive opportunity exit for the very reason that if they see strategic alignment then the price may be better than a pure financial acquirer. Much like a private equity exit, how positive that experience can be will depend on the alignment between the two businesses and whether there is a good cultural fit. If the sale is equity rather than cash, ensure that you have the same vision for the business. If you stay in the business ensure you (and your team) get a good pay-out in those early years, in case it doesn’t work out long term.

If you are looking to stay within your business then an exit through a strategic can often work well, as corporates often see it as a sign of commitment to the business and appreciate the knowledge and understanding you bring. Eight Roads saw this with two of its portfolio companies; InnoGames (acquired by MTG in 2016) and Treatwell (acquired by Recruit in 2015), the founders still remain heavily involved in these businesses today.

“You want an entrepreneur who is hungry, not starving”

As an investor you don’t want founders spending their time worrying how to pay the bills. Smart investors will try to create partial liquidity along the way, taking pressure off founders under financial strain. This means everyone can focus on making an exit at the right time and for the right reasons.

As a founder you also have a role to play in managing your investors’ expectations when it comes to plans for your exit, keep the lines of communication as open as possible and leverage their networks if required. Investors can also be useful when it comes to arranging attractive earn-outs for a team that wants to stay on.

“Look for what you’re not, not what you are”

An exit will bring a new set of challenges for a founder, particularly if you haven’t been through one before, and you need to choose your advisers carefully. Pick people (bankers, lawyers etc.) that you are comfortable with and have a genuinely good rapport with. When it comes to restructuring your board if you’ve gone public, find people with the experience and skills you don’t have, and try to keep as small and as independent as possible; the larger and more complicated the board becomes, the more the functionality will diminish.

Please get in touch if you would be interested in attending one of our events by emailing events@eightroads.com, and follow @8roadsventures on Twitter for updates.