Launching a startup does not always begin with the idea of creating an exit strategy from the onset. There are of course very differing opinions on this. Some would say that you should launch with an exit strategy in mind while others would say that launching with an exit strategy from the outset is merely a distraction that withholds you from the true purpose of why you launched the startup in the first place.
My friend and colleague Adeo Ressi believes that if you cannot see yourself still being passionate about your startup in 10-20 years, then you’re probably in the wrong field. He is intensely passionate about bringing about lasting change that solves the world’ problems.
Others–who I will not mention–are more of the mindset that you should launch a startup with an exit strategy in mind. I’m not saying that one strategy is better than the other. I’ve always been of the mindset that I create companies because I believe in them, not necessary because I’m trying to create the next unicorn. But again, both approaches have brought about positive change so you’ll need to decide what is best for you.
According to Investoepedia, “A business exit strategy is an entrepreneur’s strategic plan to sell his or her ownership in a company to investors or another company. An exit strategy gives a business owner a way to reduce or liquidate his stake in a business and, if the business is successful, make a substantial profit. If the business is not successful, an exit strategy (or “exit plan”) enables the entrepreneur to limit losses. An exit strategy may also be used by an investor such as a venture capitalist in order to plan for a cash out of an investment.”
Why An Exit Strategy Is Important
When pitching your startup to a panel of investors, they will typically ask you about your exit strategy. It’s perfectly okay to say that you plan to keep the company for the next 10 – 20 years or that you plan to exit in 6-7 years. In any case, you should be prepared to answer the question if asked.
Some investors will like the idea that you have an exit strategy because it shows a round plan of how you intend to provide the return on investment (ROI) that your investors desire. Others will be impressed by the idea that you plan to stick with the business for the long-term.
6 Most Common Startup Exit Strategies
1. Initial Public Offer (IPO)
An IPO is a system where shares of the business are sold to the public in the form of shares. On the upside, it brings in needed capital (in theory at least), but the downside is that founders have to give up equity and in some cases, control of the company all together. IPOs also mean that company’s finances (e.g., earnings, etc.) are no longer private, they are incredibly costly, complicated to execute and not surprisingly becoming less common than in the past. For the overwhelming majority of startups, this is just not a viable exit strategy.
2. Mergers and Acquisitions
Mergers and acquisitions will always be a popular exit strategy. Many startups launch with the idea that they will position themselves to be acquired by a much larger competitor such as Google, Apple, Oracle or others. While the idea sounds good, the pool of startups hoping for the same outcome is large. If your exit strategy is a merger or acquisition, then do your homework and make sure your startup is a perfect fit for your target. You can learn more about the steps necessary to achieve an IPO here.
3. Private Offerings
Another exit strategy is to have a private offering of shares. This does not need SEC registration and thus existing shareholders can be bought out in a new fundraiser round. There are several firms that capitalize on the 506D exemption of the Securities and Exchange Commission such as CrowdValley, SeedInvest and Crowdfunder. Learn more about Private Offerings, here.
4. Cash Cow
There are many firms that have a single product/service (or group of products or services) that generate a disproportionately high share of revenue and profits even in an industry with low growth. They are called cash cows. They can generate enough capital to keep the business afloat and profitable for the next few years or even for the long-term. Startups or existing businesses with one or more strong cash cows are sometimes viewed as favorable acquisition targets by competitors or larger players in the industry. Some of the most well-known cash cows include: Apple iPhone; Microsoft Office; and Facebook Advertising, among many others.
5. Regulation A+
A simpler variation of an IPO is Regulation A+. This enables startups to do an exchange after meeting the requirements. This allows startups to raise money in conformity with the stipulations of the SEC but without the need to publish accounts publicly like in a typical IPO. Learn more about Regulation A+ requirements here.
6. Venture Capital
This exit strategy uses a steady source of cash to infuse more investments, encourage development and attract other viable investors to keep the cash rolling into the startup. The safety net that venture capital provides is a good exit strategy for investors. Many of these firms get absorbed into VC or Private Equity portfolios.
Choosing the Right Exit Strategy for You
To sum it up, as a founder, whether you like it or not, you should be thinking about your exit strategy when launching your startup. Whether it’s your intention to stick with the business for the next 10-20 years (or a lifetime), sell it to a competitor five or seven years down the road or whatever your exit strategy may be, you have to consider it because I guarantee that prospective investors will most certainly ask about your exit strategy before making an investment in your startup.
If you are a founder and are interested in learning more about startup exit strategies, and how to choose what’s best for you, here is a great article on Startup Exit Strategies on the Founder Institute website.
I’m also happy to talk through your startup exit strategy ideas.