The Importance Of The "Exit Strategy" For Startups

August 9, 2021

When you start your startup project and prove initial success in the target market, you start thinking about growth and expansion, which stimulates you to think about the investment (Fundraising) to shorten the growth and expansion paths.

Here begins the long and often complex process of persuading potential investors to invest in your Startup.

The big question arises: What are the best ways to attract investors and quickly convince them to invest in this particular project in these difficult times?

Well, Exit Strategy is one of these ways;

As a Startup, you need to understand that investing is a long-term game and having a good and realistic exit strategy in place is a requirement for any investment. Investors should be clear (as the best possible rate) on when and how they'll be able to withdraw their initial investment, along with any associated gains.

That's why it's essential to have some idea of the timeline so both you and your investors can compare it to personal expectations.

From investors' perspective, evaluating the Startup's track record can make it easier to approximate how long the investment horizon will be. The most realistic way to judge a company's potential is the burn rate (how much money is spent each month now and in the projected financial plan).

"While some investors may be comfortable with waiting ten years to realize a return, others may want to get their money back within five years."

Attractive Exit Road Map for Investors

When you sit at the negotiating table with the investor, you need strong papers that strengthen your position, raise your company's value, and help you close the agreement on the best possible terms.

One of the most prominent strengths and attractions for investors is the exit roadmap for the Startup. 

Every Startup needs to know that one of the essential characteristics of startup projects is that they were created to be acquired or sold, not to be inherited. This is precisely the basis of an attractive exit roadmap for investors.

How to draw the Exit Roadmap?

The first thing you have to consider doing in the growth stage of the project is making a list of strategic investors who may acquire the entire Startup's equity after 6-8 years. (Approximate average timeframe for successful startups to sell).

For example, If you are a Fintech startup, you might list the biggest international Banks or international Financial consultancy firms…etc.

If you are a Health Tech startup, you might consider the biggest International pharmaceutical companies… and so forth.

In addition, each startup industry has active and effective international investors who target successful projects related to the industry they are interested in. you need to put them at the top of your exit list. 

After you make this critical list, you have to research/define their high-level selection criteria. 

So, let's say you plan to sell and exit this Startup after seven years with $100M to one of these strategic investors, so you have to define the KPIs that can justify this number after these years by considering their selection criteria. KPIs such as; Number of customers, revenue and EBITDA margin, presence in different markets, and the number of partnerships…etc.

Then we take these KPIs backward to assess the current project situation and draw the appropriate roadmap to get us to that point.

"In this way, you can make it easier for yourself to negotiate and persuade any potential investor in the different stages of the project."

Finally, is the exit strategy always linked to the success of the startup company?

Clearly, No, it's not. An exit strategy may be executed to exit a non-performing investment or close an unprofitable business. In this case, the purpose of the exit strategy is to limit losses.

Another reason to execute an exit is a significant change in market conditions due to a catastrophic event like COVID19 or legal issues in the market…etc.

That's why you need to be careful and plan for your exit strategy to make sure you're able to exit at a point you're comfortable with.

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