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June 09, 2012

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twitter.com/direwolff

Perhaps another approach would be for the entrepreneur to not take money from an investor with this question because it's clear that they don't understand the market they're getting themselves into. If the entrepreneur is just looking for "dumb money", then any answer will do so long as they say with conviction and believability ;)

Allen Morgan

Pierre,

Good comment. The key point I wanted to make is that the question is usually framed the wrong way, not that the question, rightly framed, is wrong. Aimed at the right issue (given that your only way "out" is through an acquisition, who are the logical buyers, and do you, either yourself or through your advisors (this is a lot of what I do in my "Sherpa" role), keep abreast of what the buyers are doing?), it's a question to which entrepreneurs should have a good answer.

That said, any investor who doesn't ask the question in some form, probably fits your description in your comment.

Thanks.

LewisGersh

Great post Allen. When I was an entrepreneur and raising dough, I always thought that question was silly at face value, but more about sizing up the entrepreneur and how big he/she was thinking. That in turn was codre for big funds to get comfort on how much capital they could potentially deploy into the deal since an IPO will usually allow for more capital and bigger exit value potential. If a founder said plan is to exit by sale, it inherently meant smaller potential capital to invest and terminal value. Just build BIG intrinsic value and all is good.

Kellyrporter

Well said, Allen. As an investment banker focused on software/internet M&A, I would underscore the importance of staying close to 5-10 likely acquirers and developing relationships there, in addition to laser focus on building the business and creating delighted customers. When it comes time to exit, I can assure you that those acquirer relationships prove extremely valuable. In my experience, most boards and CEOs give good lip service to the importance of developing those relationships, but relatively few prioritize enough that it happens in an effective way. Instead of "if we build it, they will come" the mantra should be more like: "as we build it, we need to tell them about it and stay close to them".

Allen Morgan

Lewis Gersh adds a good, additional bit of explanation. He's right: in the "old" days, for an entrepreneur to admit anything other than he wanted to IPO was code for "not a big enough dreamer".

Thx, Lewis. Good clarification.

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