What Are The Best Exit Strategies For Startups And Investors?

Introduction

The main aim of every startup business or investor is to make returns on their investments. For most startup owners, the focus is on growing their businesses and becoming top players in their industries. But the same cannot always be said for their investors. See, investors – even those in total support of your business – are majorly concerned about how to get returns on whatever they have put into your startup. This is where exit strategies for startups come into the picture. 

What is an exit strategy?

Contrary to how it may sound to a layman, an exit strategy is not a way to get rid of or “exit” your business. Instead, exit strategies are ways investors make returns on investments in businesses. Many startup business owners tend to forget the importance of planning an exit for their businesses. Planning an exit strategy for your startup doesn’t necessarily mean the end of the startup; instead, it is a form of insurance for your investor. Your planned exit strategy can even help you decide on how to structure your business and make it attractive to potential investors. A lot of investors request to know the exit strategy before investing in any startup business. So startups need to know the several exit strategies out there, how to plan on using any one of the strategies, and when to exit at the right time.

However, in this article, we will be focusing on the best exit strategies for startups and their investors. We have done some extensive research and put together a list of the best exit strategies. Take a look:

Mergers and Acquisitions

This is one of the most popular exit strategies used by businesses and startups all over the world. M&As – as it is more referred to – are ways startup owners can unite their companies with other companies to become stronger or sell out to bigger companies. In the case of a merger, the startup chooses to unite with another already existing but larger company in the same industry. Mergers are usually done to expand the reach of the companies and gain new, fresh ground in the market. There are several types of mergers, each with a different process. 

Acquisitions, on the other hand, involve the partial or complete taking over of a business by acquiring the business. Acquisitions have the same motives as mergers but entail more of a bigger company buying out the smaller ones. Facebook’s acquisition of Instagram in 2012 has helped both social media giants to grow even bigger together. The acquired business may be allowed to keep its staff, depending on the nature of the buyout. With M&As, both companies involved get a boost and may even attract more venture capitalists than before.

Initial Public Offers (IPO)

Startup owners can choose an exit strategy that offers their investors security on their monies while staying in full control of their business. They can do this by going public and doing an IPO. IPO stands for Initial Public Offering, and it merely means offering some part of your startup business to the general public by selling shares. By going public, your startup will be able to give early returns on investments to your VCs. IPOs also offer you a chance to buy the shares and own part of other companies. Huge global companies like Twitter, Facebook, and Alibaba have all successfully gone public in the past. When done at the right time, IPOs could even raise enough money to grow and expand your business.

Private Offers

This is a way of selling out your startup’s shares or part of the stock to companies or venture capitalists privately. With private offers, less time is needed to plan and execute the private offer. This method doesn’t involve money as it is free and requires no real formal registration to do. The business is privately offered usually to individuals or companies with the same goals and interests. A lot of online-based startups – and even other normal ones – have found ways to raise money online using several methods, including private offers and crowdfunding.

Holding On to Your Cash Cow

Sometimes, not all startups need to sell out or merge with one another to ensure returns for their investors. Sometimes, just continuing the business can be enough. How then do these businesses exit? Well, startups and companies with an excellent business model can decide to continue to operate independently and grow their profits. These types of companies can convince their high-spending VCs (cash cows) to guarantee returns by using part of their profits to pay dividends to investors. The investor is then assured of the startup’s liquidity, and the business can continue without needing to go public or try any other form of exit.

Venture Capital Companies

Investors want returns on their investments, and one way to assure them of that is by keeping a steady cash flow in the business. This can be achieved by refinancing through venture capital companies. These companies usually invest in promising startups by pumping cash into the startup. They provide an unshakeable source of funds for increased growth and development of the startup. Also, with the increased investments, they help draw the attention of other high-spending investors to the startup.

Other exit strategies include removing yourself from the business and letting others carry it forward or entirely dissolving the startup. Even if nobody wants to do that, there may be useful ways to exit.

Every startup has an exit strategy that is most suitable for its goals. The best exit strategy will help you satisfy your investors by giving them returns on investments, making a profit even when your stake is reduced in the business, or reducing your losses if the startup fails. As such, it is best to carefully consider and decide on which exit strategy will be best for your firm. We recommend that you also consider these few things before choosing your exit:

• Consider the possible reason/motive for your exit.
• The pros and cons of the exit.
• Other options to take.
• Relationship with potential acquirers/buyers.

Conclusion

When pitching your startup to investors, one of the major things they want to know is your exit strategy. It is always best to consider and plan an exit strategy right from the beginning of the startup. It should be part of your business plan. Every investor would like to know that their investment is secure and going to yield returns at the end of the day. And most times, the startup’s exit strategy assures them of this. However, it should also be emphasized that the use of data room for startups and investors may be a crucial point.

However, there is no simple way of choosing the right exit strategy for your startup. You are bound to ask questions like “when is the right time to exit?”, “Should you go public or private?”; “Is selling the right option for this startup?” All these questions can be answered through careful planning and structuring. 

Finally, before you go start looking for investors, take a good look at your startup business plan and ask yourself; “if you were an investor, would you put your money into a startup with this exit strategy?”