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For founders and entrepreneurs building up their business, the initial startup stage typically focuses on the product, technology or service offering. You’re energized by your idea and engrossed in building the best business concepts possible. While all of this is vital to your business and essential to the success of your company, it’s also critical to keep your sights set on the end result: your exit. It may seem counterintuitive to think of your exit strategy in the early stages of starting and running your business, as there is much to do as a young company — product development, go-to market strategy, hiring, etc.
In most cases, early-stage companies need outside capital and significant runway (the amount of cash needed before a capital raise) to pursue a strategy and fund the company. That said, if you’re able to self-fund your business without outside investment, an exit is something to consider and potentially plan for, though not a requirement.
As an entrepreneur-turned-angel investor, I had to learn this lesson firsthand through my experience building up a company and then selling it to a publicly held firm within the industry. I was fortunate to have seasoned consultants, mergers and acquisition lawyers and investment bankers as guides throughout this process, as I had to shift my perspective and position my business for investment. With their guidance and support, I was able to receive 10 different offers for the business before choosing a successful exit.
After I sold my company, I ended up in a leadership role within the new parent organization and, in that role, one of my responsibilities was to evaluate acquisitions, giving me more insight into exit strategies. Today, I am an angel investor as well as a board member and advisor to early-stage companies.
Given my background, I’d like to share the importance of planning your business exit strategy and how your mindset plays a critical role. As an entrepreneur launching and growing your business, it’s essential to keep your eye on planning so that you see an exit for your company. Your exit strategy is one of the first things a potential equity investor will ask about. Anticipate the question, have a slide about it in your pitch deck for investors and strategically think through the answer, as it will affect your prospects for securing investment.
Here are some points to consider as you think about your exit strategy:
Adjust your perspective
Change your mindset from an entrepreneur to investor in order to see your company through a different lens. It’s similar to evaluating various investment vehicles, funds, stocks or bonds from a risk and return point of view. Realize investors may look at your company in the same way by looking for risk and return. They see exit plans from hundreds of companies each year and often select companies based on risk and return criteria. Realize investors expect a return, and investment paybacks in the overwhelming majority of cases require an exit.
Look at similar companies
Research and understand similar companies in your space that have recently sold as you are thinking about your exit strategy. When talking with potential investors, make sure to highlight these examples so investors can imagine their return. This will vary depending on the type of company you run but often is X times sales or X times earnings before interest, taxes, depreciation and amortization (EBITDA).
For example, with a life science company, the comparables may involve a past company that was purchased on the value of patents, FDA or other approvals and market potential.
It pays to do your homework. Pitchbook, Google Alerts and information from investment banks are just a few sources for uncovering this information. Just as in real estate, comparables are key to showing similar sales.
Be sure to demonstrate to investors that you have had and will continue to have conversations with potential acquirers (most likely strategic buyers, synergistic product/technology companies, current and future customers, channel partners and even competitors). As you run your business, continue to reach out to strategic partners who may have an interest in your product from a selling point of view or other businesses that may have a hole in their product line.
Be clear about your intentions
Equity investments are not loans, and a percent ownership in private companies only has value when it is sold to another company or goes public. Investors want to be sure you want to sell after scaling your business rather than run the business and grow it organically. This type of business is often referred to as a “lifestyle” business — and it’s rare you’ll receive investment for this business type. Your company may be great but also challenging from an investor point of view when they are looking at the overall return.
Usually, exits are either to a strategic buyer in your industry or with private equity companies. A strategic buyer will buy your company and either incorporate it as a business unit within their larger umbrella or merge the company into its own operations. A private equity firm is also a viable option, where the result is your original company plus the private equity firm injecting further cash into your company to more rapidly scale the business. An IPO, or an initial public stock offering, is a possibility but is quite rare, as this needs significant capital and elevates your risks.
All these alternatives give you and your investors an opportunity for a return on investment and to cash out. There are many different exit strategies to consider as you weigh what’s best for your company.
In your proposed exit, be sure to highlight the general timeline you expect using similar examples as guides. Just as you researched multiples of similar companies that recently sold, look in your space to research the timing of similar exits of comparable companies. Note that most investors don’t expect a return within the first year or two. Realistic returns vary by industry but frequently take five to 10 years or even more.
Developing a strategy for an exit plan shows potential investors you understand their perspective. Put on the investor “hat,” and think as they would! Consider the key questions they’ll ask you, and as you develop your exit strategy, you’ll be capitalizing on the great work you’ve done bringing a needed product or technology to market.