If you plan to fund your startup with external capital, you might consider seeking angel investors. Angel investors are affluent individuals who provide capital for a business startup in exchange for partial ownership equity. Angel investment often serves as a first round of financing after initial seed money from family and friends. Additionally, angels are frequently successful entrepreneurs, business executives, or attorneys who can offer management, leadership, and guidance to your startup.
This series of posts aims to provide insights into the criteria angels consider when investing in a startup. These posts will help you understand an investor’s mindset and assess whether they would be willing to invest $100K in your business. Use these posts as a tool to evaluate your business’s strengths and weaknesses. Regarding funding options and methods, please refer to my post titled “Funding Your Start-up The Jugaad Way” for alternative and potentially less costly ways of raising capital. Regardless of your chosen funding path, it’s crucial to prepare a well-crafted investment pitch that can significantly impact the success of your startup launch.
#12 Exit Strategy
Starting a passion project and transforming it into a sustainable and successful company that provides you with the financial means to live your desired lifestyle would be an ideal dream come true. So, why would you consider leaving it in the beginning? It’s called an exit plan, and it could be the most crucial document you create.
Here are four compelling reasons for having an exit strategy:
1. You yearn for the entrepreneurial spirit of the start-up phase: the energy, excitement, and creativity that come with creating something from nothing. The reward of building that idea into a profitable venture through inspired and focused hard work is its soul.
However, once you achieve the reward and the lifestyle you’ve dreamt of, you might find yourself longing for the challenge of starting all over again. The funding and freedom from selling your company would provide the opportunity to do it all over, except perhaps even better.
2. Running the business long after its launch can transform it into a monotonous day job. It becomes less about innovation and more about operations, less about creativity and more about conformity. As your startup gains traction, you may find that the fun diminishes by the time you’ve grown to dozens of employees and are earning enough revenue (and personal income) to no longer need to worry about financial concerns. In essence, the inspired work is done, and it becomes less enjoyable.
3. You may find yourself at odds with investors who are shaping your company in a direction you didn’t intend. If you concede too much control of your startup to investors in the early stages, you might regret it later. As your company grows, your board members become your bosses, and shareholders and investors can exert significant influence.
Investors will want to receive their money back. Remember, equity investments are not like bank loans with interest. Investors won’t earn any return until they cash out through subsequent rounds of investment or the company is sold. Most investors will expect a five-year exit plan and a detailed financial plan outlining how they will benefit.
Angel investors often seek returns of 10 to 20 times their initial investment, depending on the startup’s risk level. Angel investing is one of the riskiest ventures in the world. You’re giving up your time, creativity, and efforts, and they’re providing the funding. A clearly articulated exit strategy is essential for angel investors, specifying how they will extract a return on their investment.
Angel investors are more interested in how you’ll execute your chosen strategy. In your exit plan, outline the operational strategy that details the specific steps you’ll take to achieve the exit.
Some questions to consider are:
- Will sell the company to an established corporation in your industry?
- Will your exit be through subsequent rounds of financing (i.e., venture capital)
- Will you use the public market for an IPO?
- Will you buy out your investors using your own finances?
Here are some common exit strategies to assist you in developing your plan:
- Merger & Acquisition (M&A) – When another company buys your company through a takeover or merger.
- Initial Public Offering (IPO) – When you sell your coney to the public in the form of shares.
- Sell to an Individual Buyer. This is a private sale of your company. All outstanding debts and shares will be liquidated.
- Buy-out Your Investors – You use your own finances (either cash or traditional bank loans) to buy out the shares of your investors.
- Liquidation and close – This is simply closing the doors and liquidating. Though this is not an exit strategy most investors would be interested in unless it was a REIT investment.
An exit strategy might appear pessimistic, but it actually presents a realistic and optimistic outlook on how everyone involved in the start-up will benefit financially. It’s not just about chasing the rainbow and finding the pot of gold; it’s about determining the precise timing and method of achieving that goal.
Moreover, the exit plan can serve as a roadmap to navigate and potentially avoid the pitfalls that can arise from investor conflicts. Numerous famous cases illustrate this point. For instance, Steve Jobs, the visionary behind Apple, was forced to leave the company that revolutionized the tech industry. Similarly, George Zimmer, the founder of Men’s Wearhouse, and Rob Kalin, the co-founder of Etsy, also faced challenges and ultimately lost control of their companies. Even Andrew Mason, the founder of Groupon, and Jerry Yang, the co-founder of Yahoo!, encountered similar situations.
However, it’s important to note that there are countless other cases where ordinary founders were also asked to leave their companies, ultimately losing control and financial rewards. A striking example is the case of Bloodhound Technology founders, who received a mere $40,000 in total after the sale of their $85 million company.
The exit strategy represents the culmination of a series of milestones your company must achieve. These milestones will serve as the cornerstone of your company’s value-building. It’s the well-thought-out and executed exit strategy that will ultimately lead your start-up to financial success and capital fulfillment.
– Tyler, Founder and Principal Consultant
Thrive Venture Consulting—connecting people and ideas.