Exit Strategy
The greatest advantage of YL Ventures as compared to its peers is its intense focus on achieving rapid exits, by seeking to attract potential acquirers at an unusually early stage of portfolio company growth.
Acquirers are highly attracted to YL Ventures portfolio companies because the fund’s unique strategy allows corporations to acquire off-balance sheet research & development that is oftentimes impossible to execute internally (due to budgetary constraints, internal politics, Innovator’s Dilemma-type situations, etc).
One aspect of the fund's exit strategy is its informal Strategic Advisory Network. Members of the YL Ventures Strategic Advisory Network and other potential acquirers associated with the fund have the following roles (on a per-portfolio company basis, i.e. it is at the discretion of each Network member to decide which portfolio companies to advise on):
Prior To Investment - validate a potential portfolio company's "exitability", i.e., the degree to which such company's current technology and management can be molded in order to fit in with the acquisition strategies of the acquirer.
Between Investment And Exit - provide continuous strategic feedback by comparing a portfolio company's current positioning to the potential acquirers' strategic goals. This constant interaction and feedback is critical as it assists portfolio companies to develop their respective business strategies in a manner that fits firmly within the acquisition strategy of the potential acquirer.
Acquisition Stage - per network member, if appropriate, acquisition discussions begin after the technology has been proven with marquee customers and when a satisfactory valuation can be justified based on the strategic value of the acquisition to the acquirer.
Post-Acquisition - although no longer a shareholder of the portfolio company, the fund will leverage its established relationship with its portfolio company's management team (as an active former investor) in order to strengthen its relationship with the acquirer with a view to selling further portfolio companies to the same acquirer.
Prior to investing in a potential portfolio company, we seek to identify potential acquirers of such company by matching such portfolio company's potential product or services to emerging corporate acquisition strategies.
Relatively early in the life of a portfolio company and only months after investment, we begin a comprehensive search for the ultimate acquirer. We expect to produce a short list of such potential acquirers selected from a longer list of dozens of potentially interested parties. Once the short list has been finalized, we intend to begin informal discussions with the potential acquirers. We seek to manage this process, enabling the portfolio company's management team to focus on running and improving the business. When one or more potential acquirers indicate serious interest in an acquisition, we expect to enter into tentative negotiation discussions. These discussions involve valuation negotiation and alignment of the portfolio companies’ strategies with the acquisition strategy and business model of each potential acquirer.
YL Ventures is rather different from venture capital funds in that we seek "medium size" exits rather than "home-runs" (our small size being a key enabling factor for such strategy, as larger funds depend on large exits to deliver performance across a large pool of capital). Acquisitions at the "medium size" range are motivated primarily by strategic compatibility between a target company’s products/services and an acquirer’s desired product/service portfolio, together with the acquirer's ability to extract additional value out of the target company's product/service offering (acquisition synergies). At the “medium size” range, future revenue potential is significantly more important than past revenue because typically a "medium size" acquisition will involve products/services for which revenue potential has only just begun to be harnessed.
Typically, the decision making process for "medium size" acquisitions by strategic acquirers are confined to middle management which has the ability to approve an acquisition without significant CEO or board involvement. "Medium size" acquisitions are therefore more accessible than "home-run" acquisitions. Furthermore, by integrating management earn-out structures into the terms of such acquisitions, the fund aims to align expectations and foster trust between such acquirers and management teams. Such earn-out structures may provide a strong incentive to portfolio companies' management teams/founders to proceed with a relatively early exit by, (i) creating a profitable upside potential that will be well appreciated by management that is optimistic about “their” company, and (ii) enabling management to remain involved in the future of "their" company.
