Investors put money into risky startups to drive a superior return versus other investments. Investing in private companies has the additional risk of an illiquid stock, but implies some amount of patience with these investments. Ultimately, in order to have liquidity, there needs to be an exit.
Why Do Investors Ask About Your Exit Strategy?
Any time an investor puts money into a deal, they want to know how they will get out. However, there are a number of other reasons why investors ask about your exit strategy including:
- They want to gauge your level of commitment to building the business
- They want to understand your level of flexibility
- They want to know if you have thought about possible exit scenarios
Investors want to know that you are committed to make the business successful. Startups are not a two way street. Once you take outside money, you can't just quit. You need to commit to driving a return for your investors. If the investors or board of directors decide that you are no longer needed or wanted, that is their choice. This is an important consideration about control when you take outside investment.
Investors also want to know that you are flexible. They want you to consider all options for providing the best return on investment assessing risk and return.
They also want to know if you have considered your options. Are you just building your company to sell it to a single target acquirer, or do you have a number of options that you have thoughtfully considered? Generally, it is good to have a number of potential acquirers that would see your business as being strategic for them. Strategic acquisitions that have the potential to drive significant value for the acquirer, and where your solution is difficult to duplicate, are the best companies to sell.
How Should You Answer the Question about Your Exit Strategy?
The two most common exit strategies are selling the company in a Mergers and Acquisitions, or M&A, transaction, and taking the company public through an Initial Public Offering, or IPO. There are other possible liquidity events including reverse mergers and Regulation A+ offerings, but these are not as well established or common.
I have heard a number of answers to the question about exit strategy ranging from "What is an exit strategy?" to "We don't have an exit strategy" to "We are going to IPO." None of these answers are going to instill confidence in prospective investors, to say the least.
Your answer should be about your business and growth prospects and timing, and demonstrate your flexibility. It should also give some options about who potential acquirers might be, but that you need the exit to give you enough time to be strategic to the target buyers so that the transaction is strategic instead of "make versus buy."
It is important to include the general ideas that are in this statement:
We want to grow our business and make it great. We have a huge opportunity where we can grow rapidly. We are investing for the long term, but have a number of near term milestones that will show our growth and progress. When we get further along, we will consider M&A if it makes sense for our investors to drive a maximum return. However, we really want to build a great company for the long term and that will give us options in our exit strategy. Right now it is too early to tell, but we are addressing a massive market that is growing fast. We are solving a problem for our target customers, and it is extremely important and valuable to them. As we grow, it will be very difficult for our potential competitors to duplicate what we are doing, and it will be very strategic to the largest competitors in our space.
Articulate that you want to grow your business, that you are committed for the long term, that you are flexible, and that you will work with your investors to do what is right and drives the best return on investment.