Exit Strategies

1
Exit Strategies

• Mitch Ratcliffe
• Internet/Media Strategies Inc. InnovationWORLD
  LLC

2
Goals

• Understand the concept of an exit strategy
• The options
• The realities
• Case Study Google

3
Plan for success and failure

• 17 percent of companies that close are a
  success
• 33 percent of companies failed after four years,
  60.5 percent after six years
• Whether you are staying in the company or
  leaving, how you do it matters

Business success of new firms after four years,
1992-1996 SourceSmall Business Administration
U.S. Census Bureau (excluding C corps.) and
Congressional Budget Office
4
Exit vs. Liquidity

• A fund's intended method for liquidating its
  holdings while achieving the maximum possible
  return. These strategies depend on the exit
  climates including market conditions and industry
  trends. Exit strategies can include selling or
  distributing the portfolio companys shares after
  an initial public offering (IPO), a sale of the
  Portfolio Company or a recapitalization.
  www.ventureglobe.com/glossy.html
• Potential scenarios for liquidating an investment
  while achieving the maximum possible return. For
  venture capital-backed companies, typical exit
  strategies include Initial Public Offerings
  (IPOs) and mergers with larger companies.
  www.championventures.com/glossary.htm
• The business owner's intended method of retiring
  or transferring ownership of the company.
  www.oaktreeresources.com/Deal_Central/Glossary20o
  f20MA20terms.htm

5
Transactions

• Mergers and Acquisition (MA)
• 36 Net deals in Washington in 2001, compared to
  322 in California
• Nationally, 71 VC-backed companies saw
  transactions in Q4-03, worth 2.3B at an average
  valuation of 67MM
• Initial Public Offering 13 VC-backed companies
  in Q1-04,
• Six in biotech (433MM)
• Four healthcare/medical (272MM)
• Two semiconductor/electronics (1.9B)

6
Transaction of last resort

• Liquidation
• Preferred investors (thats the VCs, angels and
  anyone you ever want to talk to again) come after
  the banks that loaned you money
• Always remember It takes money to shut down

7
Google is not a conventional company.
8
A personal appeal to benevolent despotism

• Sergey and I intend to write you a letter like
  this one every year in our annual report.
• As a private company, we have concentrated on
  the long term. As a public company, we will do
  the same. In our opinion, outside pressures too
  often tempt companies to sacrifice long-term
  opportunities to meet quarterly market
  expectations.

9
Not by Wall Streets rules

• Management declines to offer guidance.
• Two classes of shares with 101 voting rights to
  make it harder for outside parties to take over
  or influence Google.
• We are creating a corporate structure that is
  designed for stability over long time horizons.
  By investing in Google, you are placing an
  unusual long-term bet on the team, especially
  Sergey and me, and on our innovative approach.

10
Forced to go public

• With 500 investors, they have to report some
  financial information
• Need to provide investors liquidity
• Need to provide employees liquidity
• Expected to generate 1.2 billion in free cash
  this year

11
We would like you to invest for the long term.

• Management is selling shares, taking its payday
  at the IPO
• Dutch auction, while democratic, amplifies the
  potential for irrational pricing
• With 2.7 billion more in cash, what will Google
  do?

12
Google Realities

• Management is taking care of itself
• Allocating only 10 percent of free cash this year
  to investors would provide a 10x return on
  investment
• Investors can be paid out with a fair profit
  while preserving private company advantages
• It may not be evil to Google, but what about
  the rest of us individual investors?