Reverse-Liquidity Planning™
Reverse-Liquidity Planning™ is a process we developed that focuses on understanding and planning for exit possibilities, before committing significant financial resources to a venture. This process continues as the venture evolves until the optimal exit is achieved. It’s not rocket science; but it is a tested and effective method that employs strategic research,market intelligence, networking savvy, business planning, and operational execution.
Early-stage companies are not acquired by pure coincidence. Successful “serial entrepreneurs” take steps to increase the chances of achieving a desired exit scenario. Other entrepreneurs seek this result, but most are not sure how to go about it.
Reverse-Liquidity Planning involves laying the groundwork for synergistic partnerships with potential acquirers concurrently with product development. The process is not about selling companies, because it has been our experience that companies are bought, not sold. We have found that companies interested in distributing a product to their customer base often ultimately become interested in acquiring the product and its associated development team. Thus, by identifying likely distribution partners as part of our pre-investment due diligence process, we begin the process of reverse-engineering several possible paths to liquidity.
Immediately following investment, we develop a detailed Reverse-Liquidity Plan in parallel with refinement of the company’s business plan. Once developed, the Reverse-Liquidity Plan serves as the roadmap that aligns the objectives of the entrepreneur and the fund. The portfolio company focuses on executing its business plan while we focus on building relationships with the optimal exit or growth partners for the company.
One of the most important aspects of the Reverse Liquidity Planning process is the discipline that it imposes on our portfolio companies. It ensures that each company that we invest in:
- develops and launches an exceptional product offering,
- quickly proves its value proposition in the market served,
- is capital-efficient and thus possesses a relatively low cash burn rate,
- is optimally positioned for early acquisition by market leaders, and
- possesses sufficient market value to attract expansion capital if it becomes clear that expansion will produce greater value to the founders and investors.
When an early acquisition is successful, the acquiring company gains access to leading-edge technology and the people who created it prior to the infusion of multiple rounds of venture funding. The founders are able to continue improving their product and take it to market, backed by the acquiring company’s marketing, sales, IT and support infrastructure. The early-stage investors and founders realize a strong return on their investments.
The Reverse-Liquidity Planning process is the driving force behind our decisions and actions. It determines which companies we invest in, how much capital we commit, and how we add value to support each investment.
The origin of the Reverse-Liquidity Planning process
The Reverse-Liquidity Planning™ Process evolved from our experiences as co-founders of ImageCafe back in 1998. We set out to achieve an early exit, and achieved our goal when the company was less than 2 years old by having it acquired by Network Solutions/Verisign for a 11x investor return.
After the sale, Clarence became an angel investor, building a portfolio of start-up firms. Lori co-founded a boutique M&A firm focused on raising capital for early-stage companies and helping technology companies in general achieve liquidity through acquisition. Their experiences with ImageCafe and other companies convinced them that the majority of tech companies are better suited
for early-acquisition rather than continued venture-funded growth. Consequently, a market opportunity existed for a new type of venture firm that focused on identifying appropriate opportunities for a carefully planned and professionally executed position-for-acquisition
In early 2002, Clarence - along with fellow entrepreneur J. Bogh - synthesized his thoughts around this phenomenon. He extracted the common elements of success into a proprietary, repeatable methodology that he named the Reverse Liquidity Planning™ Process. In late 2004, Clarence and Lori rejoined forces to launch Venturepreneur Partners.
The Reverse Liquity Planning™ process drives the investment philosophy of Venturepreneur Partners and is based on the following beliefs:
Early-stage companies are not acquired by pure coincidence.
Successful “serial” entrepreneurs take steps to increase the >chances of achieving a desired exit scenario.
With strategic planning and execution, early in the lifecycle, >companies can be positioned as attractive candidates for strategic >acquisition by pre-identified potential acquirers prior to investing in significant route-to-market infrastructure.
Posted by Clarence Wooten & Lori Whitted on
May 27, 2005
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