If you startup is your dream, why would you want to think about an exit? It’s going to be so successful and so much fun that you don’t need to think about what comes after. Wrong. There are two very real and practical reasons why you need to plan an exit:
- Outside investors want to collect their return. Remember that equity investments are not like loans with interest. The investor sees no return until he cashes out, or the company is sold. Even three years is a long time to wait for any paycheck.
- Entrepreneurs love the art of the start. Assuming your startup takes off, you will probably find that the fun is gone by the time you reach 50 employees or a few million in revenue. The job changes from creating a “work of art” to operating a “cookie cutter.”
In three to five years, you will be anxious to start a new entity, with new ideas and spinoffs that have built up in your mind, and certainty that you can avoid all those potholes you hit the first time around. If your startup was less than a success, you’ll definitely want to erase it from memory.
So here are the most common exit strategies and considerations these days for planning purposes:
- Merger & Acquisition (M&A). This normally means merging with a similar company or being bought by a larger company. This is a win-win situation when bordering companies have complementary skills, and can save resources by combining. For bigger companies, it’s a more efficient and quicker way to grow their revenue than creating new products organically.
- Initial Public Offering (IPO). This used to be the preferred mode and the quick way to riches. But since the Internet bubble burst in the year 2000, the IPO rate has declined every year until 2010 and is now at about 15%. I don’t recommend this approach to startups these days. Shareholders are demanding, and liability concerns are high.
- Sell to a friendly individual. This is not an M&A since it is not combining two entities into one. Yet it’s a great way to “cash out” so you can pay investors, pay yourself, take some time off, and get ready to have some fun all over again. The ideal buyer is someone who has more skills and interest on the operational side of the business and can scale it.
- Make it your cash cow. If you are in a stable, secure marketplace, with a business that has a steady revenue stream, then pay off your investors and find someone you trust to run it for you, while you use the remaining cash to develop your next great idea. You retain ownership and enjoy the annuity. But cash cows seem to need constant feeding to stay healthy.
- Liquidation and close. Even lifetime entrepreneurs can decide that enough is enough. One often-overlooked exit strategy is simply to shut down, close the doors, and liquidate. There may be a natural catastrophe, like 9/11, or the market you counted on could implode. Make rules up front so you don’t end up going down with the ship.
To some, an exit strategy sounds negative. Actually, the best reason for an exit strategy is to plan how to optimize a good situation, rather than get out of a bad one. This allows you to run your startup and focus efforts on things that make it more appealing and compelling to the short list of acquirers or buyers you target.
The type of business you choose should depend on your goals, and the way you grow it should be aligned with your exit strategy. Don’t wait till you are in trouble to think about an exit, rather think of it as a succession plan, or a successful transition.