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November 21, 2017

Pitch-Decks: Why a Startup’s Exit Strategy Isn’t About the End

You have spent an unmeasurable amount of time and effort getting your company or idea off the ground. Now you are putting together your pitch, considering what is in store for your future and making your company look as attractive as possible for investors. So why would you even want to be thinking of an exit strategy? It may seem counter-intuitive, but it is actually a very important step to make your company look more desirable to your potential investors.

Exit strategies are for the startup AND investors

The exit strategy for startups is a plan designed for the investors, and not just the founders. Investors are looking to make good investments, and the only way they achieve favorable returns on their investments is if they are able to eventually exit. Even if your company is an all-around successful and growing company, most investors generally don’t want to be in for the long haul; they want the ability to see the return on their investment in a reasonable timeframe.

Common startup exit types

Investors are looking for a company that has a solid exit plan in place. Simply assuming your company will be “bought” in the future just will not suffice. Below are some common ways that investors are able to exit:

  1. The startup is acquired by a larger company
  2. A large institutional investor, such as Series A, Series B, etc., buys out the earlier investors, such as friends, family and angel investors
  3. The startup grows enough to be able to have marketable shares, i.e. IPOs or other private markets
  4. The startup is able to grow enough to buy back the investor’s shares

Other exits are possible, but those mentioned are the most common and perhaps the most desirable.

Determining realistic exit opportunities

Looking at other companies within your industry and benchmarking is a great place to start. Having examples of similar companies being able to exit and to demonstrate the returns their investors received is a solid way to get investors to seriously consider investing in your company. Try to obtain the most specific information you can get on companies in similar industries and turn that information into a realistic projection for your company.

For example: If you are developing a software company, try to find other software companies in your industry that have exited in the past few years. If Google has recently purchased two or three of your competitors, research those exits. Then present your potential investors with the companies that were purchased and for how much. From there, you can calculate a hypothetical return for your potential investors based on the amount of their potential investment compared to the comparable exits.

Presenting exit opportunities can set your pitch apart

If you have not considered an exit strategy for your startup business, don’t feel bad as you are not alone. The State of Owner Readiness Survey of 2015 showed that 49% of businesses, including mature businesses, have considered no exit planning at all and that almost 2/3 of business owners are not familiar with all of their exit options.  Since so many companies have not considered an exit strategy, pitching potential investors on yours is one key way to set your pitch apart from the pack.

Exit plans do not materialize overnight.  Once the plan is in place, it can still take several years to implement, so it is important to start planning now to maximize your business value.  This is what investors are hoping to find while performing their own due diligence on their next investment.

If you have any questions on exit strategies for your business, or how to incorporate them into your next investor pitch, contact an Anders startup advisor.

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