Emails to a Young Entrepreneur: Exiting

Day 133 of Self Quarantine             Covid 19 Deaths in U.S.:  147,000


Flip Comic created by David Robinson

“Intention. A man’s intention is not a thought or an object or a desire, but what makes him go forwards even when everyone is telling him he will be defeated or that his chosen course of action makes no sense. Having a clear intention helps the warrior to be invulnerable, to behave like a shaman, capable of walking through walls and touching the infinite.

“The choice of path. Nothing in this world is given to us as a gift. The most important lessons are always learned with great effort and difficulty. With this in mind, the warrior-hunter never despairs or wastes his time blaming others, because he knows that whatever he does, he bears sole responsibility for his choices. A warrior cannot complain or have regrets: his life is a constant struggle, and the challenges he meets are neither good nor bad, they are merely challenges.”

Carlos Castaneda and the Sacred Lineage – a selection based on texts by Carlos Casteneda, 1925 – 1998.


Vancouver, British Columbia Canada August 30, 2013

Dear Mikhail,

Every year or so I must make a pilgrimage to Vancouver to listen to Basil Peters explain his Early Exits approach to new ventures. It reminds me of Covey’s second habit – “Begin with the End in Mind.”

I really enjoyed reading the results of your exercises for exploring “branding is everything.” I really appreciate your taking these exercises to heart and am humbled by the insights that you are generating for your new venture. I am unable to select the best brand or logo or brand promise or set of experiences for your new venture. Only you can do that selection.

As I mentioned in my first email, in my forty years of innovating by creating new ventures, I did not understand what game I was playing. I didn’t understand the game board or the rules or even what the goal of the game was. Like a new mother I made the decision to conceive a new venture (well, many new ventures as it would turn out), but I didn’t know what the end game was. I didn’t understand the game of parenting a new venture. It was like I was doing a jig saw puzzle with no picture on the cover of the box to guide my putting the pieces together.

I went through the typical progression of an entrepreneur. My first focus was on the product idea. The business focus was on the cost side – how much money would I need to create the product. The next focus was on finding customers – how much money would it cost me to get to market and generate revenue. Once we had customer and revenue traction the focus shifted to becoming cash flow positive. By the time I got through these stages I was like an exhausted parent trying to move from parenting that sweet infant to surviving an out of control teenager.

By the time you get to the cash flow positive state you have raised external capital and you now have a board of directors to deal with along with your employees, customers, suppliers, investors, competitors and influencers. There aren’t enough hours in the day to deal with the urgent, let alone the important. All of the stakeholders want large portions of your time.

At this point you start to think about exiting – either a personal exit from the company by turning it over to “professional managers” or a company exit (IPO or acquisition). In your more reflective moments you reflect on the joy that you had in conceiving the idea for the company and the peace of the gestation time. Most of us gather hundreds of ideas for the next thing that we would like to conceive. These are our day dreams.

The professional part of you tries to keep in mind what is best for the company. Should you add a new product line?  Should you expand into services? Should you find a new set of partners? All of these questions swirl around you. You start seeking counsel from your board members, investors, bankers, and consultants. Yet all of these third parties have some other agenda and you don’t know how to absorb all of their advice.

More importantly you realize that you don’t have a way to think about the advice that you are getting or a framework to represent the options.

Seven years into the successful expansion of Attenex, I felt I was missing something basic. In spite of all the reading that I do on ways to think about business and strategic networking with the best business minds I could find, I still didn’t have a way to reconcile all of the wisdom I was encountering.

Twenty years ago I encountered the Intellectual Capital approach to valuing a company along with Ijiri’s Triple Entry Accounting to capture the momentum of a company. I also liked the scenario planning matrix and methods of the Global Business Network. But I couldn’t synthesize these frameworks into something that would help me think through the next evolution of Attenex.

One night I awoke with a start and sat bolt upright in bed. Fortunately, I sleep with a yellow pad and a pen next to my bed and I quickly sketched what became the following matrix:

I’d finally reconciled the key components of Intellectual Capital with the product and services options we had for moving Attenex forward. Intellectual Capital is a framework and method for answering why the valuation of knowledge based companies (Google, Microsoft, CitiCorp, KPMG, McKinsey) were so much higher than their book value. Sveiby, Edvinsson, and Stewart had written extensively on the topic and asserted that traditional financial methods don’t measure key contributors to Intellectual Capital – the delta between traditional financial measures and stock market valuation. These authors describe the three types of intellectual capital:

  • Human Capital (Talent) – the talent base of employees skills that includes measures like the ratio of talent with advanced degrees to workers with high school education.
  • Structural Capital – the non-human storehouses of information that reside within the facilities of a company. These include the knowledge that resides in information systems and file cabinets.
  • Relationship Capital – the knowledge embedded in the business social networks (customers, suppliers, influencers) along with strategic networks.

The artificial number representing these three abstractions is typically captured in a spread sheet cell within traditional financial statements called “goodwill.” It is unmeasured and unmanaged. In a knowledge based company, these three forms of intellectual capital are the primary assets.

In the 2×2 matrix above, the vertical axis illustrates the spectrum of Talent Capital (what resides in employees’ heads) to Structural Capital (what remains in the company when employees go home at night). The horizontal axis represents a spectrum of Relationship Capital from low to high. Mass produced products (like hardware or software) typically have low relationship capital as they are more of the form “one size fits all.” On the high side of relationship capital the product or service is highly customized to the needs of the customer in order for it to be useful.

The top half of the matrix represents those products that can be mass produced and are mostly in digital form. The bottom half of the matrix is for the services arena and is mostly provided by human beings. From a product/service standpoint three of the quadrants were pretty easy to identify – software, contingent services and professional services.

What should be in the upper right quadrant? That question occupied most of the rest of the early morning. Finally, it hit me that the upper right quadrant is the realm of content. Content is mass produced, particularly digital content. However, in order for content to be useful it has to be somehow tailored to the individual consumer. The big breakthrough of the last twenty years is the search engine (Google, Yahoo, Bing). The search engine is the customizer of the mass content to my unique needs. The search engine is the vehicle for creating high relationship value. By profiling the users of content (and the content itself), search engine companies achieve high relationship capital with their consumers. The content is even more valuable the more often the user accesses the tool so another aspect of the upper right quadrant is how sticky the content site is.

A way to understand this framework (2×2 matrix below) is to place some existing companies on the matrix. Try placing the following companies – Microsoft, Google, Facebook, KPMG, Twitter, and Kelly Services. The most valuable companies are the ones that are able to monetize their content through advertising with a very large number of engaged users (millions to billions).

After using the framework to position existing companies, I took a quick look at the eDiscovery market that we were a part of. I identified the following products and services:

    • Contingent Services – the part time lawyers and paralegals (often hundreds at a time) that review documents and are hired by the project, not permanently.
    • Professional Services – the partners and associates at the law firms hired for a given matter, the project managers in all the companies associated with collecting, processing and reviewing the matter.
    • Software – all the software tools that are used to process a matter like Attenex Patterns, FTI Ringtail, Summation, and Relativity.
    • Content – the client’s private and confidential data like email and the publicly available data like case law, case summaries, and lawyer databases.

The matrix worked. I could represent any product in our market space. Now I needed to add some numbers to the matrix to see if I could quantify the relative value of each quadrant.

I started with some estimates of what the valuation multiple (company valuation divided by revenue) for companies in each quadrant. The software quadrant had valuation multiples ranging between 4-6X meaning that if a company was generating $30M in revenue it could expect an acquisition price of $120M – $180M. Professional Services firms typically have a low multiple like 1X. Depending on the business they are in,  Contingent Services businesses can have multiples that range from 1-2X.

Again, the real surprise was the Content Quadrant – the multiples ranged from 1X to much greater than 20X. No wonder Google was valued so highly.

The numbers in the matrix quadrants represent from top to bottom:

    • Valuation Multiple
    • Amount of investment money needed to get to cash flow positive
    • Earnings before interest, taxes, depreciation and amortization (EBITDA) as a percentage of revenue
    • Time frame to go from idea to cash flow positive

Over the previous six months, I’d advocated that the going forward strategy for Attenex should be to develop a review services and hosting business (Contingent Services). I watched our service provider partners generate >$300M in services business based on our software tool. If we had been able to have a services business (since we were owned by a law firm we couldn’t), we could be generating $300M in revenue. However a services business is a lot harder to manage than a software business.

Armed with this framework, it was obvious we should go into the Content Quadrant. Yet we couldn’t in the eDiscovery space. Our key content was very private and confidential and belonged to our customers. The public content that is in the space like case law and case data is primarily owned and distributed by the duopoly of Lexis Nexis and Thompson Reuters. And those businesses were closer to the 1X level because the content didn’t lend itself to advertising, nor did the users want to have their searches profiled.

Several times during our business evolution I looked at the potential of the patent marketplace. Now I had the framework to see that the patent market was the next place to move strategically. Our Attenex Patterns software could be used without any extra development. We just needed to ingest the free and publicly available patent database. Through a variety of value adding means we could do valuable unobtrusive professional advertising to increase the valuation multiple. If we invested a little bit of resources, we could add the missing database in this space – product data. Combining the USPTO database, the SEC financial database of S1 and 10K reports, and our proprietary product database, we should be able to get to a 10X multiple of revenue within a year.

Within a few short hours (after ten years of unconscious incubation), I had a framework for representing the state of a company, and I had a game board to think through the strategic options for our company.

As I presented the framework to colleagues, we realized that the matrix also provided a way to think through the process of evolving our company.

Remembering Shields Strategy, I shared the path through the four quadrants with my colleagues as a starting point. Jack Shields, Executive Vice President of Sales and Services for Digital Equipment had one simple strategy – take every expense item and figure out how to turn it into a revenue generating business. Using this precept, we realized our quickest way (at almost no cost) to get to the content quadrant was to hire a few patent experts and sell a few professional services projects to generate the content that would be valuable. We didn’t even have to look very hard for the customers as 20% of the litigation our product was used for was patent litigation.

Then we could generalize the content and analysis techniques from the professional services projects to be the basis of our missing “product database” which is a key to determining patent infringement. That would allow us to move to the higher multiples of the content quadrant. To keep the different databases updated and normalized, we would hire contingent labor (probably offshore) to add value to our content.

The arrows in the above matrix indicate this movement from the software quadrant to professional services to the content quadrant to contingent services. We’d taken an R&D cost and turned it into professional services revenue and then by moving to the content quadrant we could dramatically increase our company valuation. And we’d get lots more users of our product.

As we worked through this process, I saw that we’d moved from understanding how to think about intellectual capital and how it affects valuation, to a way to think about corporate strategy to developing the levers for how to increase valuation.  With the valuation capture framework, we had a way to prioritize new products and product features.  We could estimate which new products and new features would lead to higher valuations.

At every opportunity I started sharing what I now call the Valuation Capture framework to entrepreneurs. You can imagine my disappointment at the lack of understanding and the eye rolling that entrepreneurs showed towards my brilliance. The only folks that sort of “got it” were serial entrepreneurs who’d actually gone through an exit. These are also the only folks who deeply understand Saras Sarasvathy’s effectual entrepreneuring framework. Like most adult learning, if you haven’t experienced it, it is hard to make meaning. Once again, I ran right into the challenge of “experience first; make meaning second.”

In one of these sessions, I bemoaned the problem with Christine Martell, CEO of VisualsSpeak. Once she understood what I was presenting she asked if she could play with the design of the diagram. In a couple of days, she shared with me the visualization below:

I couldn’t believe the difference a well-designed diagram made. Instead of belaboring the topic for an hour to entrepreneurs, they take one look at the diagram and go – “Oh, we should be in the upper right quadrant shouldn’t we? So how do we get there?”

Bingo. The right question.


Being the astute entrepreneur I’ve gotten to know over the last several months, I know you’ve already realized that you have to start now to work on your Valuation Capture. You can’t wait until it is time to exit. By then it is too late.

Begin with the end in mind.

Starting at the end of the new venture process – the exit – is what I’d missed for forty years. During the new venture journey the concept of valuation is often present, particularly when you are doing an investment round. You have to deal with concepts like pre-money and post-money valuation. However, these are just simple arithmetic formulas that are devoid of any real understanding.

Through all these years of intrapreneuring and entrepreneuring, I had failed to recognize what game I was playing – the valuation game. Nobody ever shared with me how I could increase my valuation (other than generating more revenue) and that some product efforts are much more valuable in the end game than others.

Begin with the end in mind.

Mikhail, I’ve enjoyed the opportunity to participate in your journey of discovery as to what you are conceiving and the business that you are creating. Thank you for the gift of your questions, your responses to the exercises, and your patience in letting me share some of the concepts I’ve discovered on my journey of effectual entrepreneuring.

I am going to be “off the grid” for quite a while so this will be our last email.

My fondest hope is that during our shared journey you’ve discovered, developed, and are trusting your inner entrepreneur North Star.

God grant me the serenity to accept my team, my customers, my investors and my suppliers as bringers of opportunity;

The courage to change my understanding of what the customer truly needs;


The wisdom to know the difference between what is right and what the investors, the board and the bankers want.


As I’ve done for you, the best gift you can give me is to take your acquired wisdom and  “pay it forward” to a young entrepreneur.

Yours in entrepreneuring,

Skip Walter


Applying Exiting

The theme for the flipping perspective this week is to look at large and small recent startup exits and understand their exit value from a flipping perspective view.

    • Select an exit that is documented in the press (Instagram, Whatsapp …)
    • Capture an image of the founders or their products
    • Free write on what the factors were in their receiving the valuation they did. What can you do to enhance your valuation in a similar manner to the exit under study?


The Cosmos of the New Venture

The beauty of the enneagram is that it is a recursive model. Exiting is the 10th step in a nine step system. It begins the cycle again. By exiting, your company is bringer of opportunity to another group of investors.

Exiting is CAPTURING your rightful valuation.


You can find a PDF of the full Preface, Forward, and Chapters 1 – 10 here.

You can find the introduction to the Cosmos of the New Venture here.


This entry was posted in Content with Context, Emails to a Young Entrepreneur, Entrepreneuring, Flipped Perspective, Learning. Bookmark the permalink.

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