So, what is your exit strategy? Can you elaborate on how it will work? You have probably heard these questions if you have pitched a company to an investor. The way that you go about answering them is critical to how investors will perceive the opportunity that you are trying to get them to be a part of. This can make or break entire deals. An “exit” is the way that a company plans to make money for investors in the long-run. Investors usually want to invest in companies that have high potential for lucrative exits, which means that they think that your company will provide them with a very high return on investment (ROI).
So what are my options?
There are a variety of options that you can choose from. In order to figure out what you should do you can look at the current events and trends of the industry you are in. Know how other similar companies have exited before. You should understand what has historically happened in the past and what the options for the future could be.
You are not limited to the options that I will list below, there are a variety of strategies far beyond the three that I will be talking about. If you create a company that provides tremendous value you will have the leverage to do the exit that benefits you the most.
The first type of exit I will talk about is the acquisition. An acquisition is when another company acquires or buys your company. This can come in a variety of forms, and they might want the founding members to stay and help run the company, so that they get the most value out of what they are spending their money on. This option is available when you have a company that possess something that another company might want. That can be some type of intellectual property, customer base, or something that will help the acquirer beat the competition.
One of the most notable examples I can think of is when Facebook acquired WhatsApp for over $20 billion. The question that comes to mind is why Facebook would spend this type of money on a company that actually was a at a net loss of over $200 million. The reason for WhatsApp’s acquisition was because of the customer base that it had. The customer base was very active and in lots of less-developed countries where Facebook had not penetrated the market yet. This acquisition will enable Facebook to have the access to those markets, and be one step ahead of other social media platforms that are fighting for a spot in the market.
The other route you can take is to do an Initial Public Offering (IPO). An IPO happens when a company offers their stock to the public market. Anyone would be able to trade and own shares in the company with this method. It also allows a company to grow and raise more capital by selling more equity shares. Even though your company is entering the public market, this is considered an exit for investors and founders because of the increase of value the stock that is held will now have. IPO’s can be very costly to do, but also have immense potential to increase the company’s overall value into the millions, if not billions.
One of the most recent IPO was done by the social media platform Snapchat. Snap Inc. opened at a trading price of $17 per share, when the markets closed on the first day the stock price had risen to about $24. According to Business Insider “Snap's cofounders, Evan Spiegel, 26, and Robert Murphy, 28, rang the opening bell on the exchange earlier Thursday. At the IPO price, Spiegel's stake in the company is worth at least $4.5 billion. Murphy's stake in Snap is valued at closer to $3.9 billion.”
The third option you have is to liquidate and close your company. This is not a strategy you would be considering at the beginning, but some startups do fail and it is critical to recognize when you need to close shop. Remaining with a company that has not been able to make major progress after pivoting, talking to advisors, and trying everything else to make it successful will have a high opportunity cost for entrepreneurs. If your company were to be liquidated you can start another company when the time is right, and you will have all the knowledge from your past failures which will help you avoid any of the mistakes that you made the first time. This is definitely not the strategy an investor wants to here because this would mean that they lost their potential for a high ROI. Instead of a high ROI the only thing they can rely on to get some of the money that was invested back would be from everything that is being liquidated.
Being clear on what exit would be the most beneficial to you is critical. Start thinking of strategic companies that might want to acquire you in the future. If that’s not an option create a milestone schedule that will be the path leading you to an initial public offering. Ultimately what an investor looks at when they ask about the exit strategy is how well thought out the plan is. Knowing what you want to do and mentioning the potential options you might have gets everybody more excited to work with your company as an advisor, employee, or investor.
About the Author
Brian Garrido is currently studying business and entrepreneurship at UNLV, while aspiring to create his own business. He plans on going to graduate school to continue his education, and is always on the lookout for interesting ways to help out his community.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of RVF or UNLV. In addition, thoughts and opinions are subject to change and this article is intended to provide an opinion of the author at the time of writing this article. All data and information is for informational purposes only.