How to prepare for your exit: lessons from veteran advisor and investor, James Viggers.

A longstanding member of Cambridge Angels, James studied engineering at Trinity College, Cambridge before spending his career in investment banking in London & New York. Now an angel investor and non-executive director with his professional advisory days behind him, he is one of our resident experts on exits and exit planning.

So, James – you’ve worked on exits both as an M&A advisor and as part of a selling management team. What’s the biggest misconception founders have about exits?

There is a cliché about building companies being a marathon not a sprint. The misconception is that the exit is the finish line.

A buyer isn’t buying a moment in time – they’re paying for your company’s future. They need you to deliver not just your tech, but your team, your customers, your revenues, your trajectory. And this takes time. If earnouts are involved or if your exit path is via IPO then that delivery phase might stretch out over three years or more. Sadly, collapsing over the finish line isn’t really an option

When’s the right time to sell?

It very much depends on the company. The thoughtful, long-form answer is to ask: when might a transaction best help us achieve our mission? When would joining a bigger player genuinely help us go faster or further than we could alone? This might be never – you might be the crack team that’s going to scale your company to global domination. However, it’s often earlier than people think. You might be developing pure IP and the aim might be to exit as soon as possible. In either case, my opinion is that the best exits aren’t cash-outs, they’re springboards.

The only wrong answer on timing is to wait until you absolutely have to exit. If you are out of energy, out of cash or have no other options then you are very unlikely to get a good outcome.

If your drive to exit is financially motivated that’s fine. But you should be prepared to have grown up conversations around the management table regarding personal financial goals – a surprising number of people have a target of “more” which can be unhelpful when discussing timing!

Incidentally, trying to time a market peak is a mug’s game. Many perfectly-timed exits are just good luck. It’s better to focus on being quietly but consistently exit-ready. That way, if someone makes you an offer out of the blue – and that does happen, especially in hot sectors – you’re in a position to move. With exits, you need to be prepared before you can be opportunistic.

What actually increases valuation in an exit?

You will already be doing your best to make a success of your company. So the next answer is: preparation!

Ask yourself now – today – who your actual buyers are. Not vague categories like “big pharma” or “US fintechs”. Real names. Do they actually buy companies like yours? For decent prices? Can they afford you? Why would specifically-they buy specifically-you? Think all this through – it might impact your views on realistic exit timing and provide valuable input into your medium term strategy.

Do you know anyone at the buyers? Can you find a legitimate business reason to start building a good relationship? Can you find an excuse to have a cup of coffee at a conference or similar? You can’t start that work too early.

Then, get your house in order. I have a wish list from my days as an investment banker of “things I wish our clients had started thinking about six months before calling us”. That rumbling succession issue? That niggling worry that your IP assignment might not quite be entirely right? Non-trivial, but solvable in advance. If they come to a head in the middle of a sale process you are in real trouble. And they will come up – buyside due diligence can be pretty punishing! You will also need to give warranties around these issues on sale, and these will be much more onerous that you might be used to from previous capital raisings. It’s much easier to start early here.

A note on competitive tension. You need more than one potential buyer at the table. If you’re only talking to one firm, your negotiating leverage is basically little more than asking nicely. It can work, but you are unlikely to get the best deal.

What tends to go wrong?

This is a longer conversation! Some things are fairly obvious – leaving it too late, having only one buyer, failing to prepare. Some issues can come out of left field – a single large customer blocks a deal, it turns out a key employee never actually wanted to sell in the first place, an investor whose expectations haven’t been properly managed suddenly cuts up rough on signing day.

You shouldn’t assume that even a benign exit process will be quick or straightforward. It probably won’t be. There’s a lot of diligence and negotiation. It can help to have proper advisors – good ones are worth paying up for. Plus, it’s easy to forget to keep running the company during all this. Ironically, that’s when momentum matters most.

What should founders be doing now – even if they’re years away from selling?

The “zero-th” step is to make sure you understand what you and your team actually want from an exit. Have you discussed this recently? Are you all aligned? Are everyone’s aspirations realistic?

Then start by refreshing your exit plan and listing your likely acquirers. Build these relationships. This is partly about looking good in front of your potential buyers but also about doing your diligence on them – you will be looking for a home for your team and cultural fit can be key.

Keep your house in order: legal, tax, HR, IP. Put proper KPIs and systems in place, then hit your targets. Make sure your wider team have medium term incentive plans. Think about gently moving your company culture beyond its start-up phase – would you actually fit as part of a larger organisation?

And don’t forget to talk to your investors. Make sure expectations are aligned – not just on timelines, but on valuation and the kind of deal you’re aiming for. Misalignment here can derail everything later.

How do things typically play out after the deal closes?

The transaction is just one step. The integration is where real success (or failure) often happens.

It can be a bumpy ride. Being acquired is deeply unsettling for staff. You need a clear plan for communication, retention, and integration. If there are redundancies, they need to be handled decisively and respectfully. Again it’s slightly different for pure IP vs revenue generating businesses, but you should think about branding, customer messaging, supplier relationships. Especially if there’s an earnout involved, you want everything post-deal to go smoothly.

Any final words of advice?

Remember: it’s not a wedding, it’s a marriage.

Exits are stressful and exhausting. There will be late nights, missed forecasts, emotional flare-ups, honest mistakes and at least one moment when someone threatens to walk away. The goal isn’t just a signed SPA, it’s a successful handover and a strong future.

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BVCA Model Docs - What Founders should know

In February 2023, the BVCA brought out their latest set of Series A model investment documents (‘the Model Documents”).

Interestingly, the BVCA explicitly states that they are not suitable for seed and earlier rounds. Despite this, I have observed their growing use in seed (and even pre-seed) investments. In this short article I’ll highlight some key issues Founders should look out for in these Model Documents and explain why they might not be a suitable template for seed and pre-seed investment rounds. For reference, you can find the suite of documents here.

Definition of “Investors” and “Major Investors”

From the outset, the Model documents define “Investors” as those owning “Series A” shares. As you would imagine, a vast swathe of control/consent and information rights are reserved only to those meeting this definition and usually exclude the Founders and any existing investors.

In addition, the documents also introduce a hierarchy with the concept of “Major Investors” who are defined as “Investors” owning above a certain percentage of the company. These Major Investors are granted specific control rights, such as pre-emption on new share issues and share transfers, which are not extended to other shareholders (more on this below).

The Case for Ordinary Shares and Consensus Driven Decision-Making

I always view early stage investing as a partnership with Founders. For this reason, I prefer to see pre-seed and seed investors coming alongside Founders in Ordinary Shares to maintain that sense of parity.

Furthermore, whilst I agree that investor consents form an important check and balance, I would advocate for a more consensus driven approach which includes the Founders, such that those consents require a sensible percentage of the overall equity to vote in favour. To avoid an unwieldy process, those consents should be kept to a short list of major matters to stop unfair prejudice of investors. Operational consents, like spending or debt decisions above certain threshold, can be left to an Investor Director or Observer (note to self: this person should be wisely chosen!).

Pre-Emption Rights

One of the biggest points of contention in the Model Documents is how pre-emption rights are dealt with. Here the statutory pre-emption rights (for new share issues) that exist in the Companies Act 2006 are permanently disapplied. Instead, pre-emption rights are reserved to Investors or Major Investors.

Whilst Founders often lack the funds to reinvest meaningfully in their own company, the idea of excluding them outright doesn’t seem right. The same issue arises where angels have backed a company in the early rounds. There is an issue of basic fairness but more than that: we all know that a start-up’s journey can be a rollercoaster that may well include some – shall we say – “difficult” terms in a funding round. Therefore, both an investor’s and Founder’s key protection with respect to the terms imposed by later investors is their pre-emption right to participate in later rounds. If that’s gone, the risk-reward for angels looking at pre-seed and seed is shifted materially.

In my own experience, this is the biggest issue with the Model Docs and where the most time is spent trying to negotiate a more equitable position. My personal view is simple: pre-emption rights are sacred!

Other Key Clauses to Watch

Founders should carefully review several other provisions in the Model documents, including:

- Anti-Dilution Protection: the Model Documents include broad-based anti-dilution provisions as standard.

- Pre-Emption Rights on Share Transfers: Founders should look carefully at matters such as pre-emption rights on share transfers as well as who has (and doesn’t have!) Co-Sale rights

- Drag-Along threshold: Consider whether the threshold % aligns with the post-funding realities of the cap table.

Final Thoughts

The growing use of the Model Documents in the very earliest funding rounds has been interesting to observe. However, as the BVCA itself states, these documents are not designed for this purpose and I do tend to agree.

Instead, for seed and pre-seed investments, Founders and investors alike should perhaps see these documents as a starting point and be prepared to negotiate terms that better reflect the realities of an early-stage partnership. Alternatively, there are many other sources of documents for pre-seed and seed funding rounds.

GenAI: “Land Grab or Bubble”

Early in November 2024 Cambridge Angels held one of its externally sponsored dinners; this time on GenAI: “Land Grab or Bubble”. Held at Clare Hall in Cambridge, it brought together 30 prominent academics, investors and corporate leaders active in this space.

With over 2 hours of discussions (with particular thanks to Ronjon Nag for his brilliant chairing) we have since been asked as to what its conclusions were. It would be impossible to extract a single answer but CA member, Simon Blakey did a post on some of the highlights that resonated for him and agreed that we could copy it here:

• One guest argued that AGI is here now; nobody talks about the Turing test anymore because we surpassed it. Another guest argued that this was not the case and LLMs are still only producing answers based on statistical probabilities. AGI requires abstract thought and LLMs cannot do this. They can’t reason and they have no working memory. The also don’t know how to forget.
• [It was also pointed out that self-awareness/consciousness had been debated since the time of Socrates, so we were unlikely to reach a definitive conclusion on where AGI was over dinner]
• One guest stated that LLMs are best suited where hallucination and a small amount of misinformation can be tolerated. In contrast, another guest argued that in materials science at least, hallucinations are not necessarily negative and could be used to help initiate new lines of research. An open question was also asked as to why we should hold AI to a higher standard of correctness than humans.
• One speaker thought that in 20 years there will be a path to read/write directly from computers to the brain
• The question was raised about how AI is impacting our brain. Eg there’s growing concern that children might be losing some capacity to develop and interpret micro-expressions particularly because of increased screen time. This led to a brief discussion around evolution but some guests argued that environmental evolutionary pressures have always been present on humans and AI was merely the latest of these
• Leading on from this, some discussion was had around the career changes that were being precipitated by the advent of AI, with one guest describing an interesting matrix where routine, repetitive, manual and cognitive jobs would be the first to go whilst those which were non-routine, creative and requiring a ‘human veneer’ (empathy, ethical judgement and personnel connection) would be around for longer and use AI primarily as an augmentation tool
• Some discussion was had around which market verticals investors should be focussing their attention and whether long-term value was within the increasingly commoditised LLMs or with the wrappers, training data or outputs. There was consensus that model outputs that could have IP protection, such as pharma molecules, would have real value.
• Finally, several open questions were raised; why are we wasting time and resources building AGI when our focus should be on climate and health? Can we use the tools we have now to solve these critical problems? Similarly to what extent will we use AI to make decisions for us? Will it extent to politics? Will we allow AI to decide about the best person to be in charge?

[and no, we did not discuss disinformation or the outcome of the US election…]

It was a brilliant example of the convening power of the Cambridge Angels network and we are now canvasing opinions for themes and sponsors for the next one

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Reforming the UK’s capital markets - 6 key points - Simon Thorpe

Simon Thorpe former Chair of Cambridge Angels and active angel investor, has shared his thoughts on the recently published Blair Institute report.

Early last week the Blair institute published a comprehensive and well researched report on reforming the UK’s capital markets. You can find their report here.

As an entrepreneur running my own business, a prolific angel investor in UK private companies and an ex UBS research analyst in the public markets, this report struck a chord with me.  

Why?  Because it underlines the importance of equity research, and because all of my successful angel investing exits have been via a trade sale to overseas corporate buyers.

20-30 years ago I would have expected at least some of these companies to float on London’s public markets and yet not one single company of mine has IPO’d. Of my current 35 company portfolio companies an IPO is sadly a distant prospect and a NASDAQ listing is much more likely because of the depth of growth capital and the much greater appetite for risk in the US. 

Unfortunately the declining number of growth companies listing in the UK is also driving a lack of highly experienced Chairs and NEDs with operational experience and ultimately this weakens the UK’s ability to build and grow companies of scale. Radical change is needed to address the UK declining capital market’s position

 For those of you who have not yet had the chance to read the report here are the 6 key points including recommendations.

1. The decline of UK Capital Markets:

• The UK’s public capital markets, including the London Stock Exchange (LSE), are facing significant challenges. The value of the LSE has been growing much slower compared to global peers like the US S&P 500 and the UK has slipped from being the world's largest stock exchange to sixth place.

• Institutional underinvestment, excessive regulatory burdens, and low liquidity are major reasons for the lack of success, particularly in attracting and growing high-tech companies.

2. Challenges for Scale-Ups:

• The report highlights three key challenges:

• Lack of institutional investment in large private and newly public companies with high growth potential.

• Barriers that reduce investment in smaller public firms.

• An unfriendly public listing environment for smaller firms due to low liquidity, limited professional-analyst coverage, and high compliance costs.

3. Loss of Tech Companies to Foreign Competitors:

• Many of the UK’s brightest startups are either relocating or being sold to foreign competitors due to these capital market issues. The report notes that the UK risks losing its ability to become a hub for high-tech companies unless substantial reforms are made.

4. Recommendations for Reform:

• Close AIM and reform LSE: Merge the Alternative Investment Market (AIM) into the LSE Main Market, creating a rapid route to listing for high-growth tech firms with specific tax and regulatory benefits.

• Improve IPO Environment: Revamp the Private Intermittent Securities and Capital Exchange System (PISCES) to support pre-IPO companies and attract institutional investment.

• Expand Venture Capital: The UK government should allocate £1 billion to invest in five growth-focused venture funds to support large-scale investment in pre-IPO companies.

• Cut Regulatory Red Tape: Simplify compliance and governance requirements for asset managers and smaller listed companies to reduce costs and encourage greater investment in high-growth sectors.

• Encourage Analyst Coverage: The government should act as an anchor purchaser to expand equity research coverage of smaller, high-growth companies, particularly in tech sectors.

5. Addressing Institutional Risk-Aversion:

• The UK’s pension and insurance systems are highly risk-averse, resulting in chronic underinvestment. In contrast, the US has driven growth through its pension funds and venture-capital ecosystems, which power the success of tech giants.

6. Lessons from Hong Kong:

• The report draws comparisons with the Hong Kong Stock Exchange, which successfully reformed its listing rules to attract biotech and life sciences companies. It suggests similar targeted reforms to attract innovative companies in the UK.

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