How To Avoid Canada’s “Early Exit” Startup Problem

Stefan Palios

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Many founders earn well under market compensation and rack up personal debts to build their companies—so it’s hard to blame them for “selling too early” to take care of their families. But it doesn’t need to be this way, says Mark Longo, Co-Chair of Osler’s Emerging and High Growth Companies Group and Managing Partner of Osler’s Vancouver office. Speaking with TechExit.io, Mark explained more about how private and growth equity can offer financial security and enable opportunities for a company to achieve scale in the future.

Key takeaways:

  • Company growth requires significant financial resources and knowledge—two things a startup may not possess in-house.
  • Private and growth equity helps clean up the cap table, brings growth playbooks to the table, executive networks, and a new slate of investors that are aligned with the company’s vision.
  • The keys to successfully finding a PE or growth equity partner lie in knowing what benefits you need from them, delivering the right financial metrics, and having a clean data room that navigates any metaphorical skeletons in your company’s closet.

They say Canadian entrepreneurs sell too early.

On one hand, the financial security from a 7-figure or 8-figure exit can set you up to tackle the billion-dollar beast next time. On the other hand, you lose the momentum and culture you built up in the first company by exiting early.

What if you could have both—financial security and momentum?

That’s what Mark Longo, Co-Chair of Osler’s Emerging and High Growth Companies Group and Managing Partner of Osler’s Vancouver office, thinks private and growth equity can do for a startup on the cusp of transitioning to a scaleup.

Speaking with TechExit.io, Mark explained how a majority recapitalization transaction can de-risk growth for founders and early investors.

Growth requires different resources

Once a startup hits a few million in annual revenue with clear signs of product-market fit, it’s time to change gears from startup to scaling. That could mean a lot of changes, such as adjusting your go-to-market motion, considering international expansion, and potentially launching into buy-side M&A activity—activities that require resources and team knowledge you likely don’t have in-house.

“Seed funds and early-stage venture capital funds are great in those early Seed to Series B stages,” said Mark. “And then they typically don't have further dry powder to help fund subsequent rounds of investment. And they may also be a little bit tapped out in terms of the value add they can provide.”

When founders hit this stage, they typically consider an exit. After all, raising another VC round will come with further dilution and years more work—all for what may not be meaningfully more money for the management team and early investors.

But this is where Mark thinks private equity or growth equity can help, giving founders some optionality while enabling them to go for the “second bite of the apple.”

“Growth equity enables the company to get to the next level of growth so that a subsequent exit, which could be an IPO or an acquisition a number of years hence, can occur when the company's at a further stage of growth.”

How private and growth equity de-risks growth

Working with a private equity or growth equity partner can offer founders a path through the middle period of company building.

Cap table clean up: Partnering with new investors typically means cashing out early investors (angels or Seed VCs), in whole or in part. This isn’t necessarily a bad thing—the next level of growth may not be their specialty and early investors may have liquidity needs after holding onto an investment for several years.

“Growth equity and private equity funds play that role of injecting new cash on the balance sheet of companies, while very frequently allowing early Angel investors, and VCs to take some chips off the table and gain some liquidity,” said Mark.

Secondaries for founders: When a PE firm comes into play, there’s often an opportunity for founders, executives, and employees to take some money off the table. This allows them to clear debts or set up their families so they can focus on growth rather than personal financial worry. Management often “rolls” a portion of their equity forward in these scenarios, in order to participate in the future upside of a liquidity event.

Growth playbooks: When you partner with a private equity or growth firm, you also gain the benefit of their growth playbook in areas such as product development, technology, sales, go-to-market channel development, finance and M&A. This can not only accelerate growth but open opportunities you wouldn’t have been able to create yourself—or, if you could, it would have taken much longer to materialize.

Networks: Just like you get access to a playbook, you also get access to your growth partner’s network of seasoned executives and independent board members to help you execute the playbooks and round out any talent gaps that might exist in your company.

“Early investors gain some liquidity,” said Mark. “And you now replace them with incoming investors who are aligned with the vision of the company and bring a longer-term perspective in terms of holding their equity until an ultimate liquidity event in the future.”

Mind your skeletons

Like an exit or VC fundraising round, there’s a lot of work involved to get ready for PE and growth equity. In particular, Mark recommended that companies proactively have a data room ready to go with relevant metrics.

From there, he said to engage value-add partners (such as investment bankers, lawyers, and tax advisors) to help with the capital raising process. Finally, make sure to identify and address in advance any due diligence “skeletons” such as intellectual property protections, patent litigation, cap table issues or incoherent corporate documentation. It’s also crucial to identify if a PE or growth equity partner is a good fit for your company by conducting your own due diligence on a fund’s investing track record and establishing a mutually agreed upon governance framework.

Mark mentioned, though, this may not work for every organization. If there isn’t a large enough total addressable market and a viable strategy to win in the space, injecting more cash onto the balance sheet may not deliver the necessary results to warrant partnering with a PE fund. You also need to think about what you want as a founder—if you’re looking for a high-quality exit but are less concerned about building a global business, the PE route may not be the right fit for you.

But if you are looking to build a global business like Jane or Clio, the PE/growth equity path might be the perfect mix of present liquidity and future upside.

“An injection of new cash on the balance sheet with a new financial sponsor or sponsors can ultimately lead to a much larger exit in future,” said Mark. “The key is achieving alignment between the management team seeking that ambitious goal and incoming investors who share the goal. It’s having a thesis about a certain market and finding partners who can help execute on that goal through organic and inorganic growth.”



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