Preparing Startup Assets for a Future Exit

My last post allowed for some interesting discussions AFK. A particular one involved a roundtable of investors and entrepreneurs regarding three main topics:

1) who am I to propose a new definition for anything
2) what are the typical derisking practices any startup can use
3) how business assets and real options relate to startup strategy

I believe the latter deserves a deeper discussion, so writing this post helps me get rid of that burden.

Business Assets Can Be Planned from Scratch

Remember that time you were drafting your Business Model Canvas and felt kinda clueless when filling the “Key Activities” and “Key Resources” blocks? That’s you right there and then, still immature and unsure of what can be the most important assets of your early-stage startup.

The harder you think ahead those resources and activities, the better your view on what is really valuable for your business. The processes and resources that only your startup can develop and improve – really, only your startup – are not only the pillars of your business, but also the things that support your true value proposition. They are your most precious assets, and have to be polished until they are the very engine that differentiates your business from all others – then, scalability and repeatability may be only natural consequences.

Consider anything that may be of great value in a startup: a killer algorithm, a secured patent, an incredibly loyal group of early adopters, or a founding team who will create the next big thing. The end consumer sees only the consequence of that: the service provided by the startup. The key assets of a startup are useless if they haven’t been proven critical to materialize the business, whatever importance founders brag they have.

Invest time planning ahead for your startup’s most important business assets.

The Best Business Assets Become Real Options

Real options can be defined as the alternatives that bring management flexibility. The concept is not commonly found on the vocabulary of entrepreneurs, but is widely used in venture capital and private equity. When a startup consolidates a product, achieves tactical or strategical advances for its assets, or simply marks the territory with a positive market move, it may be buying flexibility to pursue new future directions for the business.

For early-stage startups, real options are like breadcrumbs you leave behind when you pivot: they are backtracking paths you can follow back if everything blows up on your next move. It is so because when you’re grasping towards validation, it’s very hard to see farther than your closest objectives – and they’re often more tactical than strategic. When you leave plan-Bs around, it’s much easier to secure previously abandoned directions that are now promising – compared to the disastrous pivot you just spent months on trying.

If handled carefully, an unsuccessful pivot may be pocketed and saved for a better time. And as startups mature, the planning for real options can help prioritize on where to pivot next.

Startups: A Remixed Definition

Startup acquisitions usually involve one strategic business asset or real option. The most common are:

  • Client portfolio, mostly in B2B startups and important to big enterprises that wish to expand to the longer tail of revenue profile.
  • User base, mostly in B2C startups that present an above-average user growth – an example is Whatsapp, that grew in 4 years what Facebook took almost 10 years to grow.
  • Growing revenues and/or profit, simply because it’s cheaper to buy now a startup that’s growing fast than after it has grown even more.
  • Geographical dominance, mostly when a global startup is expanding to a new country and it’s cheaper to acquire the local leader than to invest in a regional operation from scratch.
  • Patents or products that are technologically advanced and provide the buyer an open path to diversify, or to make a strong stand before competitors.
  • A killing team that may operate a new business unit and oxygenate a big company wishing to innovate.

If you’re a startup founder, analyze the assets that will become one of those exit motivations. If you’re an investor, forward this post to your invested founders. Remember: in the startup game, it’s all about strategy.

To close the post and reinforce the sentence you just read, I’d like to come out with a remixed definition of a startup, coined after a late night conversation:

Real startups are investment targets that develop and secure unique real options faster than my next raise

Can’t say I disagree.