The DNA of Startup Exit Strategy

The DNA of Startup Exit Strategy

March 23, 2017

While there is a common perception that startups should focus on growing the business and not on exit strategy, many experts today believe that a healthy exit strategy will actually strengthen the stakeholders’ alignment towards creating value. With the growth of private equity and buyout funds available in the market, a well-designed exit plan can increase the entire value of your business. 

 

Exit strategies largely depend on the type of company and its fit in the market rather than on personal preferences of the founders. For example, it may be possible that the best exit strategy for a partner in a restaurant chain is to sell to an existing partner. On the other hand, a preferred exit strategy for a sole owner of a computer services store may be to earn as much money as he can followed by closing the business. 

 

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“The largest number of exit transactions today are in the under $30-million valuation range. These exits are often completed when companies are only two or three years from startup.”

      -Early Exits/Basil Peters

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Why your startup may need an exit strategy

 

Outside investors such as angel investors or venture capital (VC) expect a return on their investment (Exit Value) and therefore will expect you to cover your exit strategy in your pitch.  A good tip here is to mention similar size companies to your startup that were purchased and at what price.[1] Remember, at the end of the day, if your startup is purchased by a bigger company, the outside investors cash in on their investment.

 

 

 

When to Exit

 

Setting a target date and price may seem like a simplified idea, but can dramatically affect your steps towards achieving your end objective. To get the most out of your startup’s selling price, you may want to seek an exit when growth rates are high rather than when you are very profitable. A good exit strategy must be closely tied to the growth forecast of the organization and the actual growth. A startup that demonstrates that the actual growth performance is significantly higher than the projection will experience a large increase in the company valuation.

 

How to exit?

 

Exit strategies have best case scenarios and worst case scenarios. Planning for both is essential. One exit strategy worth considering is Mergers and Acquisitions (M&As). The entire process ranges from 4-5 months to up to 18 months. This strategy involves identifying which companies hold complementary skills and resources. Larger companies will look to grow their revenue faster through an acquisition rather than investing in products: a successful startup is a safer bet since it has been tested and proven itself in the market at least to some extent.

 

Who takes the lead in the exit transaction is crucial. There are aspects you can control in the process. In this critical time, the CEO will likely need to focus on the business. Therefore, choosing a broker or M&A advisor is essential. For example, in the bidding stages, a good M&A advisor can make it known that several companies are potential buyers, thus increasing the selling price significantly.

 

Startups often will perform a private offering of shares to individuals or a select group of investors. The advantage here is that the process is less expensive and time consuming than a public offering. At times, the investors themselves may be entrepreneurs and the company can thus benefit from their experience. AngelList, CrowdValley, SeedInvest, Crowdfunder, Fundable, OfferBoard and CircleUp are examples of online firms that facilitate private offerings[2]. They follow certain regulations concerning the amount of capital the startup must have and proof of expertise in the market.

 

A different type of acquisition is called “acquihire.[3]” This takes place in an earlier stage of a startup, when a big company is more interested in your team than the product.

 

A scenario you may not be hoping for but should plan for in advance is liquidation. It’s a safeguard for the value of your startup. Liquidation is not the same as bankruptcy, which damages your credit ratings for years to come. Bankruptcy should only be a last resort since records are open for public review, making it difficult for future endeavors. Instead, map out a set of rules for cases when the circumstances in the market change unfavorably.

 

The term “Built to flip “lends itself today towards opportunities to exit earlier on. To better design and execute, founders should clearly articulate the exit strategy, align it with stakeholders, sign it off and review it regularly.

 

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[1] What Startups Need to Know About Exit Strategies/Tim Berry

 

[2] 6 Startup Exit Strategies for Investors/ David Drake, The Huffington Post

 

[3] How Can Startups Exit and Investors Make Money?

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Incentive Management Inc.
Ariel University Center of Samaria Upper Campus, Building 10 
+972 (0)3 908 5000
+972 (0)3 936 6873
Incentive, Peregrine Ventures Incubator 

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