It may feel strange to talk about leaving your business when you are in the early stages of building it. However, having a clear exit strategy is vital to securing investment and achieving your financial goals. Clarity around your exit enables you to keep a focus on two critical objectives – retaining as much equity as possible and building valuable assets. Together, these are the vital components that will determine the amount of money you walk away with when you leave your business.
Your startup exit strategy is also an essential part of any pitch for investment. During every round of the Fundraising Journey, potential backers will expect to hear how you plan to exit the company. For them, any investment is finite, and they’ll hope to cash out in three to five years and make a sizeable return. They’ll only choose to invest in your business if they believe the return will be higher than if they put their money in the bank or played the stock market. So, you must provide an exit plan every time you pitch.
Benefits of a startup exit strategy for investors
When you pitch to Angel Investors, Venture Capitalists or any other big-money investor in the early stages of a Fundraising Journey, you are selling them a vision. They can’t look at the finished product and see exactly where they’ll make their money.
It’s rather like a house buyer investing in a new build property that is being bought off-plan. You wouldn’t merely purchase a plot of land and hope for the best, you’d expect the developer to have detailed computer visuals that show you what you are buying. At the start, the only thing in front of you is bricks and cement, but you’d expect to see what the finished house is going to look like.
At the beginning of any entrepreneurial journey, all you can show the investors is the equivalent of bricks, cement and, if you are lucky, a ground floor. In your business plan and during pitches, you need to present them with details about the finished product. Your exit plan is that finished product, the detail of how everyone is going to realise a good return on their investment. If you don’t even mention it, warning bells will start ringing. Investors don’t see your business as a life-long journey, they’ll want out in good time. So, if you pitch without an exit strategy, don’t expect to win backers.
Benefits of an exit strategy for entrepreneurs
Having a clear exit strategy helps you to avoid making bad equity decisions during early stage investment rounds.
For example, if you know your ideal exit valuation is £50m and that you want to exit your business with at least 50% of the equity, you won’t be tempted to give too much away in your early rounds. Instead, you can focus on how to build value in your business between each stage of the Fundraising Journey to attract more significant investment in return for smaller shares of equity.
Similarly, if you see yourself as a potential unicorn, you may be willing to part with more equity in order to get to your ideal exit. You may only end up with 10% equity come the day of exit. But your shares are worth much more than if you had 50% of a £50m business.
You need to be keenly aware that decisions you make today will have a massive impact at the end of your Fundraising Journey and that if you give too much equity away early on, it’s your investors who’ll be quids in, not you. An exit strategy should empower you to optimise a good situation and create a legacy.
As an entrepreneur, you are likely to thrive during the exciting and challenging process of building a business, not the day-to-day grind of running a big company. Your skills are best deployed as you start, develop and grow your entrepreneurial idea. Finding great ways to build valuable business assets, achieving swift growth through inspired ideas and becoming sustainably successful are the things that make you tick. When the company is established and ticking along, you’ll likely want out so you can launch your next idea.
How to exit successfully
Raising investment is a long, drawn-out process. It could easily take you six
Here are three main ways most founders successfully exit their business.
Merger & Acquisition
You could sell your company to a similar business which would bring immediate financial rewards for you and your investors. A merger can provide a win-win situation for you and your buyer. These types of buyers can quickly combine their resources with your company’s and should already have complementary skills to take it over smoothly.
If you set yourself up as an attractive acquisition, you can catch the eye of bigger businesses looking for an efficient way to grow their revenue, expand their offer or bring in your talented team. It’s far easier for them to buy up a smaller company doing something that their customers want than to develop another side to their business organically. An acquisition can be a fast and fantastic way to exit and enjoy significant financial compensation.
Initial Public Offering (IPO)
Perhaps you will choose to go down the route of an IPO, making shares in your company available on the public market. This strategy comes with additional regulations, and you may need to remain in place for some years as the business establishes itself as a public company. You may also be subject to a lock-up of your shares for six months or more, so you can’t cash out fast. Your investors, however, will be able to sell their shares when they see fit. As private investors who got in before an IPO, they should also receive share premiums that boost their return. As an exit strategy, it’s a long-term plan for you as the entrepreneur, but it can pay dividends if done successfully.
Management buy-out or friendly sale
Another option is to sell the company to the current management team in a buy-out deal or to find an interested party who wants to buy it off you. This is a clean, relatively uncomplicated way to exit and pay both yourself and your investors, leaving the business in the hands of your buyer. The benefit to the buyer is that they have an interest in taking over operations because they believe they can scale it up further, but don’t need you in place to do so. You can leave and take the money you make onto your next entrepreneurial project.
Whatever route you decide to go down, make your exit strategy clear from the start. In doing so, you’ll prove to investors that you’re serious about the financial rewards you can all reap from the success of the business. You’ll also know that you are creating a legacy that you can enjoy from afar.
months to complete from beginning to end, and, during that time, you’ll also have your day-to-day business to contend with. When that happens, there’s a good chance you may lose sight of your strategic vision and overlook the critical elements you need to make your investment objective a success.
What’s the solution? Take a step back from day-to-day operations and look at your business from a helicopter point of view. Re-familiarise yourself with the preparation phase of the Six Principles of the Perfect Pitch and take advantage of our PitchPrep platform to highlight details about your business you’ve never noticed before. Many of our clients found these an invaluable way to improve their business model, create higher-value product offerings, or just keep them inspired and keep their momentum going through the long months that raising investment can take.
Don’t forget, if you want to find out more about becoming an Investable Entrepreneur, you can download a free copy of my bestselling book here.