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Startup exit options, plans & strategies for your business

Begin with the end in mind – Stephen Covey

Whether you are just starting up or have been in business for a while, have you thought about the exit options for your startup? With all the emphasis on starting, scaling, and growing a business, it’s easy to ignore how as a founder, you will exit.

The biggest benefit of planning your exit from the start is that it helps you to make good decisions for your business.

Smart entrepreneurs not only focus on creating their business but also plan how to exit in the best way possible, especially if you are a startup that has raised money from angel investors and venture capitalists.

The average age of a startup at exit is at 7-8 years. However, you need to start planning the exit within the first 1-2 years of starting the business. The best case is if you can figure out your startup exit options, plans & strategies even before you start building the product.

As founders, we all think that we can score the billion-dollar payout, the moonshot that would become the next Facebook, Google, or Twitter. But, the chances of that happening is infinitesimal.

The really interesting story about tech exits is not the small number of really big company acquisitions—it’s the big number of smaller exits.

For the typical entrepreneur, these smaller transactions are an excellent way to make several million dollars and should be part of every company’s exit strategy.

Exits are the most exciting part of being an entrepreneur.  It’s when we get financially rewarded for all of the creativity, hard work, investment, and risk we put into our companies. Exits are also important for the startup-venture capital ecosystem.

The whole purpose of founding and building a scalable, high-growth startup is to benefit from the growth in the value that you have created.

Let’s look at the exit strategies & options available to you as a business or a startup.

 

Profits

If you haven’t raised money, you can decide to capture value by reaping profits and growing the business incrementally and independently.

It is possible to start from nothing to build a big company and continue to own and operate it for the rest of your life while making a good living off the profits it generates.

For any business, this is the best option as it gives you complete freedom and control over your business.

However, this option becomes less available as more and more people begin to have an economic interest in the venture’s outcome. And, this is definitely not an option if you have raised venture capital.

As a premise of the current era, startups and growing companies should adopt a simple approach—start small, stay lean, raise only the funding you really need, grow the business frugally.

 

IPO

Launching the business into the open market through an initial public offering (IPO) is the exit option that most entrepreneurs dream about. In this scenario, your business becomes a publicly-traded company, which means that all of its stock can be bought and sold through the public stock market.

If this happens—and if you as the company founder continue to hold a portion of the business’s equity after several investment rounds—your ownership in the company will now be liquid and can be converted into cash at any time.

An IPO can also raise a large sum of capital for the business, thereby facilitating enormous future growth.

The challenge is that an IPO is an extremely complex process, can cost millions of dollars, and requires a large team of lawyers, accountants, and investment bankers, as well as compliance with a host of onerous legal requirements.

More difficult, however, is the lengthy, challenging task of attracting interest from investment firms through a roadshow in which you present your company’s story hundreds of times. Think of it as a crowdfunding campaign multiplied 100-fold.  In other words, IPOs require a lot of preparation, formalities, and are expensive.

Only a teeny-tiny fraction of the companies launched in any given year are likely to end up going public—but the handful that does often garner headlines and, in some cases, create great fortunes.

In recent times, it would be unrealistic to expect to file for an IPO without continuous high revenues and profits.

Globally, startups are now taking longer to IPO or even avoiding that route, most probably because there is a large amount of capital available in the market from VCs, PE firms, and other institutional investors.

 

Private Exchanges

Since 2016, a few private exchanges have emerged to fill the void in the IPO market.

EquityZen and SharesPost have sprung up, offering shares of sought after start‐ups to eager buyers. Stockholders in a startup can sell shares in smaller deals through such firms that match buyers with sellers of private shares.

Companies like Scenic Advisement works with founders who want to create liquidity in an illiquid private stock for late-stage private companies.

The secondary market is evolving rapidly. With the absence of IPOs, this medium for doing institutional deals might become more common in the future.

 

Acquisitions

Given the odds against an average company being able to achieve an IPO, the most common way a positive outcome occurs for a high-growth startup is through an acquisition of the company.

For a startup whose product is a natural extension of the acquirer’s own products, or provides traction in a market that the acquirer needs to enter, the startup is usually folded into the larger company.

Decision making assessments for startups

If it’s a big acquisition (such as Instagram, the photo-sharing service purchased by Facebook in 2012 for a billion dollars, or YouTube, the video service purchased by Google in 2006), the startup is generally kept in one piece and the CEO can take on an important role in the acquiring business.

But, for the other 99.9% of entrepreneurs and investors, the really exciting news is a large number of tech company acquisitions in the range of $5 million to $50 million. Many of these acquisitions are so small they aren’t even talked about in the press.

Potential buyers include fortune 500s, medium to large-sized companies, high-growth startups, private equity funds, and even rich individuals.

Pure cash exits (particularly for founders, as opposed to investors) are typically restricted to those cases where the acquirer is looking for value that the startup has already created, as opposed to people who will create more value in the future. That could mean high-value recurring users, monopolistic market rights, or technology that would be expensive or time-consuming to replicate.

In most cases where an acquisition is for cash, a majority of the cash would be locked up and payable to the founders only after they’ve spent some years with the buying company.

In the case of a company acquiring a startup for stock, one of two situations likely applies: either the company doing the acquiring is a very large one (Google, Facebook, Cisco, etc.), where the stock has real, determinable value and is therefore effectively the same as cash. Or, if the company is a much smaller one (perhaps only a bit larger than the target), where cash is tight and the stock it’s paying with is the only way it can do the deal. In that situation, everyone effectively becomes partners and is incentivized to help the combined company grow rapidly.

Big companies and high growth startups acquire companies primarily for the following reasons.

– Losing out in competition with the startup

– Capture more of the existing market

– Help serve their offerings to a new market

– Introduce new products to their existing market

– Diversify by investing in high revenue growth businesses

– New disruptive technologies that can be used internally in the company ( vs spending on R&D)

Acquisitions are all about leverage. It all comes down to supply (number of relevant startups) and demand (number of interested acquirers).

Who will acquire you will depend on

– How much spare cash they have/equivalent stock which has value (public company or high growth startup)

– Your leverage to get a good deal.

startup acquisition

As the founder of an acquired company, the good news is that you will forever have on your resume that you pulled it off: you envisioned, founded, built, and shepherded to an exit a successful high-growth company.

The even better news is that, as an entrepreneur, you will have the extraordinary feeling of satisfaction that comes from having your vision realized and the value you created recognized and continued into the future.

Acquihire

Acquihire is the instance of buying out a company primarily for the expertise and experience of the team as opposed to the products/services they’ve created.

In an acquihire, the acquired team( entire team or part of the team or even just the founder/CEO) is merged into the buyer’s team, the acquired business is either merged into the buyer’s business or is shut down altogether.

It is not an entirely bad outcome because, in most acquihires, you are given a senior role in the already established company. If the transaction was essentially an acquihire, you will have a highly compensated job with a larger, stable company for several years.

Acquihiring is often seen in established technology companies as well as venture-backed startups. Many companies see it as a way to quickly acquire proven talent. Acquihiring is increasingly common in the tech sector, where certain types of skill sets and experiences, are hot and in short supply.

Major companies like Google, Twitter & Facebook and high growth companies like Dropbox  are always looking for specialized talent and acquihire works as a great strategy

At the end of the day, they are a much better alternative for both investors and founders who can now talk about their startup that was acquired and leave with something versus nothing.

Asset Sale

If you know what your company is worth, there is no harm in reaching out to other startup founders and tell them you want to sell your business.

However, when you are planning to sell your company don’t pitch it as a sale and sound desperate. Rather, talk about how you are planning to grow the company and raise money and point towards the wins the business has made. You will be surprised, how such conversations can lead to getting an offer to either buy off your business or hire you in their team or even both.

There are also sites like flippa where you can sell your business assets, like your website or mobile app. This works out for web properties with a decent number of users or website visitors.

Another great resource is Linkedin. There are a lot of small-scale investment bankers. Reach out to them and see if they can help sell your company in exchange for a fee/commission.

In the end, you must remember that ‘companies are bought, not sold’ which means you need to make your startup look attractive and valuable to the buyer.

Get a job

Similar to an acquihire, most companies are always looking for ex-entrepreneurs for leading positions at their company. I have witnessed many cases, where some of the founders I worked with, were offered employment by more established startup CEOs. In the case of one of the startups I was working with, the business was not doing well. The founder was offered a dream job at a leading tech company, which he took.

This is not the ideal scenario for a startup founder. But given the hardships you have to go through in your startup journey, it’s not all bad.

Become a consultant

As a startup consultant, you can provide your experience, insight, strategy, hiring, and professional services to help other founders grow and achieve success. You’ll need to stay up-to-date on the startup ecosystem and industry trends.

Your passion for the startup world will help you quickly get up to speed.

It’s a huge plus if you have raised capital before and this is an area where startups require a lot of help.

If you do decide to become one, figure out how you want to be paid for your services. Do you take a fee, equity, retainer, or a combination of these options?

Start all over

Startups fail, even after you get traction and product-market fit. However, founding a startup is more powerful than doing an MBA and even working with a company for a few years.

A startup helps you master Multi-faceted challenges in a business ranging from team building, developing partnerships, networking, sales, finance & operations to name a few.

Use all the knowledge you have gained to begin your next startup and tell yourself, you are not going to make the same mistakes again.

Finally, the big question. When is the right time to exit?

This is a question that is often asked at conferences and private meetings between investors and startups. When should I sell my company? When is the right time to look for buyers? Would you rather sell your company for $20 million when you own a lot of the stock or for $200 million when you don’t own as much?

And the truth is that there is no universal answer.

Startups want to sell for as much money as possible (so do investors) and buyers want to spend as little as possible, so both parties need to find a balance.

Common sense says that for startups to maximize their selling price they should look for an exit when their growth rates are high instead of when they’re very profitable.

In the end, it’s all about understanding the position you are in and what’s viable.

startup exit plans

Parting notes

  • A profitable and sustainable startup has much more leverage when negotiating an acquisition than one that’s burning cash and struggling to pay salaries.
  • Invest in your team. Many acquisitions are driven as much by the desire to lock up scarce talent as they are by acquirers wanting to get their hands on a killer product.
  • Make sure you recruit A-players who produce tangible value as a team.
  • PR is important. Use it.
  • Bring on a corporate development executive into the team to explore opportunities.
  • Most acquisitions happen in the range of $1m – 50m.

Building a business is hard. But you need to think of an exit plan irrespective of how well your business is doing. Also, don’t forget to take some of our business assessments to see if your business is heading in the right direction.

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