I often pose this question to startups who come to our advisory sessions, “What is your exit plan for the company in 3 years?”. In response, there are often blank faces.
Some reply with this question, “Why should we exit in 3 years? We will be working on it and making lots of money with our business!” or “We like what we are doing and we are going to retire with this business”.
In the past, I as an entrepreneur wouldn’t be concerned with an exit strategy as I was filled with commitment to see my company through to retirement. My company is me and I am the company.
Learning from experience, however, and seeing how important an exit strategy is, is now part of our core methodology in advising startups in our Angels Gate Advisory free clinic services.
So why plan for an exit when we have barely even started? We should take our time and trod the way first to see what the best route is before deciding what is best for the company.
Here are some explanations:
1. 3 years is a huge time commitment. Entrepreneurship is a highly risky business. Many people enter it without ever realising how tough the journey can be.
In 3 years, it is a sufficient runway to determine whether a company is a viable business to be sold, to be taken to the next level, to be handed over to an operations team, or even to divest and wind down.
Running your own business calls for sacrifice and commitment. It is a 24/7 job. Putting a target of 3 years give founders the known end-point. Founders may put off their plans, for example, marriage, other ventures, etc. during these 3 years and give their best.
If there is no timeline, founders may get confused and make different arrangements, losing the full commitment and energy to the startup.
2. An exit strategy is a long-term goal setting in place. When you plan to exit, you help to focus and steer the company towards that direction.
This gives clarity to where you are going and what you should do to reach it. The planning for the amount of funds needed to be raised, which markets to reach for in 3 years, and so forth, would all be clearer.
3. Exit strategy is also a clear goal for investors. When investors come in, they want to know what returns they can get and when they can get it.
To say you will leave it to chance and just do your best won’t get investors interested in you. Venture capitalists have a 3-5 year investment horizon so it is important to be aligned with them.
4. If you are choosing to do a trade sale to a strategic buyer, it may take as long as 3 years to convince them to buy you out. A trade sale doesn’t happen overnight, but it takes many months of getting to know the buyer for the buyer to see what synergies can be made.
By identifying an exit strategy of a trade sale, you can learn about the buyer, their mandate and what companies they acquire and at what price.
This will give you a good indication of how much you can be valued at and whether the startup can be integral to the buyer.
5. Even if after 3 years, you decide to continue the business and grow to the next level, it is still considered an exit strategy from the initial stage.
During this period, founders who feel that they cannot contribute further are free to exit the business or pass the reigns over to a new team that are able to take the business to the next stage.
An exit strategy is also dynamic in nature and should be reviewed periodically, which is likely to be every 6 months or when a significant event has occurred.
As there are many variables that change the course of the startup, so the exit strategy should be tweaked to bring the company back on track.
If you have any experiences on your exit strategies, please feel free to share them!
This article is the nineth of the ‘Startup Advisory Clinic’ Series.
This article first appeared on Tech in Asia.