Exit trends in 2010

January… a month for reflecting and prioritizing the new year.

I always kick off the year with a quick retrospective of M&A activity, with graphics thanks to my friends at ICON Corporate Finance, based here in sunny London.

This picture says it all:

Average exit valuations have returned to pre-recession levels, above 2x sales, and are outstripping the ratios seen in recent years. In the UK,  the highest multiple was Moneybookers, which sold at 9x sales. In the US, both Facebook and Groupon made headlines with their paper valuations at $50bn and $6bn, implying multiples of 25x and 12x, respectively. (Remember that Playfish was acquired by EA in 2009 for $300M, which was reported to be 4x revenues.)

While Facebook wasn’t an exit, and the Groupon offer was just that – an offer, 2011 looks like it’s going to be the Year Things Change. There are numerous venture-backed companies generating $100M+ in revenues that are going to IPO (some of our portfolio included). The NASDAQ was up 17% over the course of 2010, and 2011 is starting off well. My employer, Qualcomm, has already announced a $3bn acquisition of Atheros this month. Linkedin, Skype, Zipcar, etc. are all teeing up IPOs this year. I’m very bullish that 2011 is going to be the year we’ve all been waiting for. VCs and Entrepreneurs alike.

Hold on to your hats.

Get Profitable

This is the 3rd Key Milestone from the Thoughts on Entrepreneurship series…

Profitability = Independence. Raising money is a pain- no matter who you are. It’s time consuming, and it’s a distraction. The sooner you can get to profitability the better. Yes, there’s the Twitter model of Build it and They will Come- worrying about revenues and profits later, but personally, I don’t think that’s what you want to do or how you want to think. Profitability should be a *choice* you can choose not to be profitable- by scaling faster – but fundamentally you should be able to cut (or curtail) headcount and be a profitable business very early in the game- this is ultra important because you never know when the economy is going to take a dip and venture funding is going to dry up. From the minute you take funding, the clock is ticking. And you’d better be running for the profitability line.

Ask any entrepreneur how much better they sleep at night knowing their company is at break even, or profitable. They’ve made it… sure, there’s still work to do to scale further, but they know they made it to first base. They’ve got a chance- and they don’t need anyone’s help (on the financing front) unless they decide they want it.

Iterate and Innovate

Once you’ve launched your product, you’d better be ready to change it. Listen to your customer (or users), they will tell you what they need. Make changes accordingly.

You have one goal in mind: to build the Greatest Product you can. It’s all about building a great product – that’s one that I’ve borrowed straight from Rolof Botha.

Examples of kind of crappy first products are plentiful: iPhone first gen (vs the 4G that launched last summer). Apple listened to its customers, and refined the product. They did exactly the same with the iPod (which was more like the iWhat? back when it launched). Spotify is a great example of a company that has taken Europe by storm because it’s a Great Product (mobile product is not great though. which is too bad…keep working on it guys).

Keeping things as simple as you can, then adding features is a great way to be successful- again, back to Twitter as an example. It’s a simple service that has evolved over the past 3 years- Twitter has iterated and innovated (they’ve come up with completely new ways of handing all that data). They obviously didn’t worry about that when they launched – hello Blue Whale of Death- but they figured it out (mostly).

Copy these great companies, ship your product, then iterate and innovate quickly and continuously.