Why planning your exit early is critical for startupsApril 20, 2020
- How founders should think about exits
- What steps startups should to take reach exit targets
Every angel investor considering allocating capital to a startup has an exit strategy. Knowing when and how their investment will become liquid is essential for determining a startup’s risk-reward profile. Taking into account angel investors’ need to exit, therefore, is critical for founders who are pitching their startup to angels. Beyond helping startups to get funded, having an exit strategy from an early stage is also important for founders because it sets a goal-oriented approach to building their company. Keeping that mind, this article is an essential guide for founders on how to plan and execute a successful exit.
Note: Although there are a variety of possible exits, including IPO and royalty stream, by far the most common exit for startups is acquisition. In this article, we’ll focus on exiting through acquisition.
Founders should be thinking about acquisition before their company even exists. Doing so will help, from the start, in determining the type of investors needed. Your acquisition potential will also inform the go-to-market strategy of your company, how you scale your team, and even how you shape your marketing.
The questions founders need to consider at this early stage are:
- Who could buy your company and why might they buy it?
Answering these questions will establish not only your ideal buyer, but also identify potential hostile buyers you want to avoid.
- What might buyers value your company at when you have reached your target size?
This can give investors a target exit price which, by extension, will help to determine your current valuation. Read more: How Do Angel Investors Value Startups?
- What does your startup need to achieve before potential buyers will be interested?
This will inform the roadmap your company needs to follow in order to reach its exit target.
Once you’ve mapped out your exit strategy and received funding, you’re ready to build your company. However, you’ll need to take concrete steps to move towards exit, even when your company is still in its early stages. Here’s what you can do:
1. Get noticed. Try to establish your company’s position in the sector. Write thought leadership pieces, speak at events, and interact with journalists (try to get quoted).
2. Network. You need to build relationships with the CEOs and senior executives of the companies you’ve identified as potential buyers. Take the time attend industry conferences and events. You can even use social media to build relationships with key industry players.
3. Get organized. It’s never too early to start preparing the information about your company that will be requested by potential buyers. In the event someone does express interest, you’ll want to have that information readily available, so make sure you keep it up to date and store it in the cloud so you can access it from anywhere.
4. Prepare your team. Make sure your management team is on the same page in terms of messaging. You won’t be able to communicate forcefully or negotiate effectively if your management team is sending out different messages to potential buyers.
5. Keep everyone informed. Your broader employee base needs to know that you’re actively seeking acquisition. The main message you need to send them is that you’ll only be considering offers that are in the best interests of the entire team.
Pitfalls to avoid
As your company reaches milestones and you move closer towards becoming a business that will attract buyers, you’ll need to be careful of a few obstacles that threaten to derail the acquisition process. These are:
1. Leaks. Don’t forget to make sure everyone knows and respects confidentiality. A lot of this comes down to trust: if your team knows you will only be making a deal that’s good for everyone, they won’t do anything to jeopardize it.
2. Getting looked at too closely too early. If a reputable buyer is allowed to take a close look at your company before it becomes a sufficiently attractive proposition, the buyer will pass. If that happens, you run the risk of scaring off other potential buyers. Before allowing a buyer inside your inner circle, therefore, you should be confident that buyer will like what he sees.
3. Forgetting about growth. While acquisition is your end goal, you need to make sure your company is the best it can be. The challenge then is too not get so preoccupied with the business of selling your company that you forget about your company’s real business.