9 Exit Strategies for Your Startup
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.
1. 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.
2. 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.
3. 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.
4. 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.
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.
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.
5. 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.
6. 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.
7. 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.
8. 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?
9. 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.
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.
FAQ: Exit Options for Startups
Q: Why should I plan for my startup’s exit from the beginning? A: Planning your exit from the start helps you make better decisions for your business. It allows you to align your strategies and actions with the ultimate goal of achieving a successful exit.
Q: When should I start planning my startup’s exit? A: It is recommended to start planning your exit within the first 1-2 years of starting your business. The earlier you begin considering exit options, the better prepared you will be for potential opportunities.
Q: What are the available exit strategies for startups? A: There are several exit strategies for startups, including:
- Profits: Growing the business incrementally and independently while reaping profits.
- IPO: Launching the business into the stock market through an initial public offering.
- Private Exchanges: Selling shares of the startup through private exchanges.
- Acquisitions: Selling the company to another business.
- Acquihire: Selling the company primarily for the expertise and experience of the team.
- Asset Sale: Selling specific assets of the business, such as a website or mobile app.
- Getting a job: Joining an established company in a leading position.
- Becoming a consultant: Providing startup-related services as a consultant.
- Starting all over: Using the knowledge gained to begin a new startup venture.
Q: What is an IPO, and how does it work as an exit option? A: An IPO, or initial public offering, is when a company offers its stock to the public for the first time. This exit option allows the business to become a publicly-traded company, with its shares available for buying and selling on the stock market. An IPO can provide liquidity to the founder’s equity and raise significant capital for future growth.
Q: Are IPOs a common exit strategy for startups? A: IPOs are not a common exit strategy for startups, as they are complex and costly processes. Only a small fraction of companies go public each year, and they often require high revenues and profits to attract investors. Startups may opt for alternative exit options due to the availability of capital from venture capitalists, private equity firms, and other institutional investors.
Q: What are private exchanges, and how do they work as an exit option? A: Private exchanges emerged as alternatives to the IPO market. Platforms like EquityZen and SharesPost facilitate the buying and selling of shares in private startups. These exchanges match interested buyers with shareholders of private companies, providing a medium for institutional deals in the absence of IPOs.
Q: How do acquisitions work as an exit option for startups? A: Acquisitions occur when another company purchases a startup. The acquiring company may integrate the startup’s product or talent into its operations. Acquisitions can be beneficial for startups, providing financial rewards and recognition for the value created. Acquirers can include fortune 500 companies, medium to large-sized businesses, high-growth startups, private equity funds, and even individuals.
Q: What is an acquihire? A: An acquihire refers to the acquisition of a company primarily for the expertise and experience of its team, rather than the products or services they have created. In an acquihire, the acquired team is merged into the buyer’s team or business, and the acquired company may be absorbed or shut down. Acquihires often occur in established technology companies and venture-backed startups to quickly acquire proven talent.
Q: What factors should I consider when planning my startup exit? A: When planning your startup exit, consider the following factors:
- Timing: Determine the right time to exit based on your business’s growth rates and market conditions.
- Financials: Evaluate your company’s profitability, revenue growth, and potential valuation to determine the best time to maximize your selling price.
- Team and Talent: Invest in building a strong team of A-players who add tangible value to your business. Acquirers often look for talented teams when considering an acquisition.
- Product and Market Fit: Ensure that your product or service has achieved market fit and has a strong value proposition that appeals to potential buyers.
- PR and Visibility: Establish a positive public image and generate media coverage to increase your company’s visibility and attract potential acquirers.
- Corporate Development: Consider bringing on a corporate development executive or exploring partnerships to uncover potential acquisition opportunities.
Q: What are the most common reasons for acquisitions? A: Acquisitions are driven by various reasons, including:
- Competition: Acquirers may seek to acquire a startup to prevent competition or gain an advantage in the market.
- Market Expansion: Companies may acquire startups to enter new markets or expand their existing market presence.
- Product Integration: Acquirers may be interested in startups whose products or services complement their own offerings, providing synergies and enhancing their overall product portfolio.
- Talent Acquisition: Acqui-hires, where a company buys another primarily for its talented team, are common. Acquirers look to bring in experienced entrepreneurs and skilled professionals to strengthen their workforce.
- Diversification: Acquiring high-growth startups can help companies diversify their business and tap into new revenue streams.
- Technology Acquisition: Startups with innovative and disruptive technologies can be attractive to companies looking to enhance their own technological capabilities without investing in extensive research and development (R&D).
Q: How can I find potential buyers for my startup? A: Here are some strategies to find potential buyers for your startup:
- Networking: Attend industry events, conferences, and startup meetups to connect with potential buyers, investors, and other entrepreneurs who may be interested in acquiring your business.
- Investment Bankers: Engage with small-scale investment bankers who specialize in startup acquisitions. They can help connect you with potential buyers and facilitate the sale process.
- Online Platforms: Utilize online platforms like Flippa, which allow you to sell business assets such as websites or mobile apps. These platforms can help attract buyers who are specifically interested in acquiring digital properties.
- LinkedIn: Leverage LinkedIn to identify and reach out to individuals in relevant industries or companies who may have an interest in acquiring your startup.
- Industry Connections: Leverage your industry connections, advisors, mentors, and existing partnerships to explore potential acquisition opportunities.
Q: What should I consider when negotiating an acquisition deal? A: When negotiating an acquisition deal, consider the following:
- Valuation: Determine the fair value of your startup based on its financials, growth potential, market comparables, and the strategic value it brings to the acquirer.
- Deal Structure: Consider whether you prefer an all-cash deal, a stock deal, or a combination of cash and stock. Each structure has its pros and cons, so evaluate what aligns best with your financial goals and risk appetite.
- Earn-outs: If the acquisition deal includes an earn-out, ensure that the earn-out terms are clearly defined and tied to measurable performance goals. This will protect your financial interests and ensure that you receive the agreed-upon amount after the acquisition.
- Retention of Control: If maintaining control or a certain level of autonomy is important to you, negotiate terms that allow you to retain influence over key decisions or maintain a separate identity within the acquiring company.
- Employee Retention: Consider the impact of the acquisition on your employees and negotiate terms that protect their interests, such as retention bonuses or assurances of continued employment.
- Due Diligence: Conduct thorough due diligence on the acquiring company to ensure they have the resources, capabilities, and cultural fit to support the continued success of your startup.
- Non-Compete and Non-Disclosure Agreements: Include provisions that prevent the acquirer from using your proprietary information or competing against your startup for a specified period.
- Escrow and Holdbacks: Consider incorporating escrow or holdback provisions in the deal to protect against any undisclosed liabilities or breaches of representations and warranties.
- Legal and Financial Advice: Seek guidance from experienced legal and financial professionals who specialize in startup acquisitions to ensure that your interests are protected throughout the negotiation process.
- Post-Acquisition Roles: Discuss your role and responsibilities in the acquiring company post-acquisition, ensuring that your skills and expertise are utilized effectively and aligned with your personal and professional goals.
- Remember, negotiation is a dynamic process, and it’s crucial to have competent advisors and legal representation to guide you through the complexities of the deal and ensure your best interests are represented.
Q: What are some alternatives to a traditional acquisition? A: If a traditional acquisition doesn’t align with your goals or circumstances, consider these alternatives:
-
- Strategic Partnerships: Form partnerships with established companies in your industry to leverage each other’s strengths, share resources, and access new markets without a complete acquisition.
- Licensing or Franchising: Explore opportunities to license your technology, intellectual property, or business model to other companies or individuals in exchange for royalties or franchise fees.
- Joint Ventures: Collaborate with another company to create a separate entity that combines resources, expertise, and market access to pursue mutually beneficial goals.
- IPO (Initial Public Offering): Take your startup public through an IPO, allowing you to raise capital and provide liquidity to existing shareholders. This option requires significant preparation, compliance with regulatory requirements, and market readiness.
- Management Buyout: If you’re looking to exit but want to keep your startup within the control of existing management, consider a management buyout, where the current management team acquires the business from the founders or existing shareholders.
- Employee Stock Ownership Plans (ESOPs): Transition the ownership of your startup to your employees through an ESOP, allowing them to purchase shares in the company over time. This option can provide a sense of ownership and motivation to your employees.
