What Startups Need to Know About Exit Strategies

Exit strategies related to startup funding are often misunderstood. The exit strategy is for the money not the startup founders or small business owners. The company brings in money and the investors get money out. Startups looking for angel investors or venture capital absolutely need an exit strategy because investors require it. The exit is what give them a return.

The exit strategy is related to startup funding which happens when investors who had previously put money in a startup get money back for a lot more money than what they had originally spent. Investor exists happen two ways: either the startup gets acquired by a bigger company, for enough money to give the investors a return or the startup grows and prospers enough to eventually register for selling shares of stock to the public over a public stock market.

The Traditional Exit Strategy

Investors expect the startups to cover the exit strategy when investors hear pitches from startups. That means talking, in the pitch and in the business plan, about how similar companies have been able to exit via selling out to a large company. The more sophisticated plans and pitches will mention recent exists and offer information about how the companies that exited were valued when they were bought.

You can understand how investors feel about exit strategy if you consider what happens to investors that do not get exits. They do not have a return, they put money into a company, but they get nothing back. Having a minority share in a healthy, growing company, without any prospect of an exit, is a terrible scenario for investors.

A Different Type of Exit Strategy

Aside from the investor-oriented exit strategy, you will occasionally hear about a different kind of exit, when the startup founders, the entrepreneurs themselves, sell their company and turn their ownership in a business into money. This is common for older people who want to finish their careers. Rarely you will encounter young enterprises who have a vision from the start to establish a business, grow it fast, and make it attractive to a purchaser and sell. These are also exits.

Common Exit Strategies and Alternatives

  • M&A – merger or acquisition by another company. This allows you and investors to cash out. The resulting entity will gain complementary skills, economies of scale, new customer sets, and hopefully a larger growth opportunity.
  • IPO – public company initial public stock offering. 16% of venture-backed startups recently used this due to high liability concerns, demanding shareholders, and high costs.
  • Find a private equity firm or a friendly person. This is an opportunity for you and your investor to cash out. The buyer has the challenge of scaling the business and managing all the operational growth requirements.
  • Liquidate the assets, cash out investors, and keep the rest. Less tangible assets like the brand name, business relationships, and even your reputation may be lost or damaged.
  • No exit. If your startup strategy is to be a lifestyle company or a family business that will grow organically and never go public, then no-exit is a valid exit strategy. This alternative is often paired with a personal no-exit strategy.

The Bottom Line

An exit strategy should always be seen as positive. It is a plan to develop the best opportunity for you, your startup, and your investors and capitalize it. It may be the end of your startup phase, but it should be the beginning of a more mature and stable business.