It may seem strange to be thinking about the end of your time at your startup before you’ve even set it up, but you need to have a timeline and plan in place early on. This will allow you to focus and work towards your ultimate goal from day one. Below we explore whether or not you should have an exit strategy in place when you startup.
What is an exit strategy?
There are several exit strategies that you can have in place with your start up, which we have explored briefly below:
- Initial public offer (IPO): selling part of your business to the public in the form of shares
- Mergers: a merger is still considered an exit strategy, and may be needed should your startup be low on cash-flow and needs to stay afloat
- Private offerings: Similar to an IPO, this involves the selling of your shares to a private group, such as investors
- Cash cow: Cash cows are organisations that have high market shares in industries that have low growth, and can help startups to stay sustainable in tough situations
- Regulation A+: This is also similar to an IPO, but offers benefits as you can raise money without having to publish your accounts publicly
- Venture capital: this involves receiving large amounts of investment from venture capitalists to help your startup stay afloat, and will make your business look attractive to investors
Why should you have an exit strategy when you startup?
No matter what exit strategy you choose to have in place for your business, they can be an effective solution for your business plan. The chances are that you don’t quite have enough cash yourself to keep your business alive and that you are looking for third party investment.
You may feel that your business is in its early years and you’re just focusing on the beginning, but investors will want to see robust and money-making plans in place for the years to come. Exit strategies will help to show this.
You’re looking for investment to get the business started, but they’ll be looking at your business plan to know how much of a return they will get when you/they exit. Some investors may like the idea of your startup so much that they are investing in the business and not the exit strategy, but generally, they will be thinking about their return.
Exit strategies are also effective ways of bolstering your startup’s cash flow and preparing for means of expanding your business or keeping your company alive further down the line.
Why shouldn’t you have exit strategy when you startup?
However, having an exit strategy isn’t completely necessary when you startup. Highly successful businessman such as Mark Zuckerberg never had an exit strategy in place when he started. So what kind of reasons did people like Zuckerberg have for not thinking of exit early-on?
Your focus, and rightly so, in the early years should be on profitability and not of being a millionaire at a young age. While this is a nice idea, if you have a good idea with a large market potential, then it may be better to focus on where you can take this rather than exiting before you know what you might be able to achieve.
It is also much better to focus on the consumer and the market that will benefit your business and your target customer first, rather than focusing on the consumer and market that will enable you to sell your business successfully. Focusing on the former will help you to establish a successful business, at which point you may be in a better position to sell. For example, Zappos built themselves up and were acquired by Amazon by focusing on the consumer, rather than the exit strategy.
Some investors actually find an exit strategy a disappointing route to highlight in pitches as they may want to see your startup thrive in your hands.
Finally, focusing on the end-goal and that big pay date can be de-motivating for your employees. If you’re only concerned with a big pay check rather than actually trying to create and build something, your employees may not see the point in trying to be creative or innovative.
What is right for my business?
Every business is different, and each will have different aims. If you don’t believe this is right for your business then don’t waste time trying to craft an exit strategy. If you do take this route, just make sure that you clearly have your reasons why, as you’ll need to sell this to investors.