David Cummings on Startups

When an Exit Strategy Discussion is Required

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David Cummings

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When asked about an exit strategy, my favorite response is that we don’t have an exit strategy — we’re building the company to be successful over the long-term and aren’t building it to sell. Of course, if someone comes by and offers a number that’s too good to be true, naturally we’d look at selling the business. Now, some investors will want a more detailed discussion of an exit strategy, so it’s important to have a plan when raising money. Here are some thoughts on an exit strategy discussion:

  • Pick five transactions in the same or similar space that have happened in the past 24 months and be prepared to talk about the financials for each (e.g. revenue, profitability, number of employees, value at time of exit, etc)
  • Choose five likely acquirers and explain why they’d pay a strategic multiple to acquire the business
  • Articulate the startup’s special sauce that makes it desirable (e.g. unique technology, great execution, amazing culture, etc)

Exit strategies are an important discussion topic when talking with investors that want to understand the perceived value of the business down the road. What else? What are some other thoughts on an exit strategy?

Comments

6 responses to “When an Exit Strategy Discussion is Required”

  1. shawnabeesebjurstrom Avatar
    shawnabeesebjurstrom

    Much like financing discussions, if you wait until you absolutely need to have them -it’s too late!

    Reply
  2. daleflipsfilm Avatar
    daleflipsfilm

    Great points -again!

    I think the bigger reason investors want to know exit strategy is to answer “how do I get my return?”

    Which is, ironically, often contradictory to a philosophy of long term growth and self sufficiency of the company. But definitely reasonable for an investor.

    That is part of the conundrum of raising money from investors: it introduces new influences into the long term strategy.

    Thanks for the good posts!

    Reply
  3. smartstartventures Avatar
    smartstartventures

    Great post David, thanks for framing the discussion so clearly.

    When talking about an exit strategy I typically focus on a strategic acquisition in a three to five year time horizon. Researching comparable transactions in the market as you suggest is critical to understanding any companies exit potential. Once a company can benchmark against those sample transactions I usually encourage the founders to really understand what that company looked like when it secured the exit. How long where they in business, how many employees did they have, how profitable were they, how much revenues did they generate, etc. This forces a discussion around what value drivers a buyer places a premium on. For example, did the company have a large R&D platform?

    At the end of the day its helpful to think about the exit strategy, not primarily for return expectations but also to understand what type of business you are trying to build. I believe a company should be built for sustainable success not just to drive an exit event.

    Reply
  4. Baker Avatar
    Baker

    I think this is a great example of why it’s important to pick investors that have similar visions as the founders and to ask specific questions of the investor upfront. There are some VC/individual investors who want to build a company just big enough to be flipped for 5x their investment in 5 years and there are those who are willing to grow the company as long as there are profitable projects to reinvest in, and many other options in between those extreme cases.

    Reply
  5. lanceweatherby Avatar
    lanceweatherby

    Unless you are on about a round C or D with ever increasing valuations never ever say an IPO is your exit strategy.

    Reply
  6. husherclarke Avatar
    husherclarke

    Hello,
    Very nice post and you choose a very good topic to talk about. Exit strategy is very important to every business. I agree with your point that ” we’re building the company to be successful over the long-term and aren’t building it to sell.” But some times your business is not working well and you faces continue losses. Then it is better to sell your business to earn some money from your business. For this you must have and strong exit strategy to gain maximum benefits from your business. You can hire some experts to make an strong strategy to sell your business.

    Thanks……

    Reply

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