A startup exit strategy is something that founders must pay attention to in the initial stages of the business. Even though it may seem harsh, 90% of companies fail, and every business is in danger of becoming one of them. Failure is a real possibility for any company. A startup might fail for various reasons, and it is often unavoidable. It pays to be ready for everything in the business world, even failure. Developing a solid startup exit plan can assist you in negotiating your way into a favorable arrangement. This article will help founders understand why prepare for a startup exit, the types of startup exit, and when to prepare a startup exit strategy.
Startup exit and strategies
A startup exit strategy is necessary for a startup for a number of reasons. It is closely related to your company’s objectives. A startup must have an exit strategy, whether it is to be sold, scaled, or acquired. Let us understand in detail below.
What is startup exit?
When specified conditions for financial assets or a startup business have been fulfilled or surpassed, an investor, venture capitalist, trader, or business owner will implement a startup exit strategy. A startup exit is a precautionary measure to liquidate all or parts of the assets. There are several reasons to implement an exit plan, including:
- To close a losing firm or non-performing investment. Here, the exit strategy’s goal is to keep losses to a minimum.
- When an initiative, whether it be an investment or a corporation, achieves its profit goal.
- When there is a dramatic shift in the market circumstances brought on by a catastrophic occurrence; legal considerations like estate planning, liability claims, or divorce; or just the specific desire of a company owner or investor to cash out due to retirement.
Understand startup exit strategy
A startup’s strategic plan to transfer control of a business to shareholders or perhaps another business is known as a startup exit strategy. A company owner can decrease or liquidate their ownership in a company using it. If the company is profitable, they do so while still making a profit. They can reduce losses if the firm is unsuccessful.
An investor, such as a venture capitalist (VC), may utilize a startup exit strategy when ready to withdraw their investment. Regardless of the nature of the investment, transaction, or business activity, an efficient startup exit must be established for every favorable and bad possibility. Assessing the risk involved in the acquisition, trade, or commercial activity should include this preparation.
Among the most crucial components of investing is money management. For instance, many traders initiate a transaction without a plan for getting out and are more prone to grab gains too soon or, even worse, run losses. To limit losses and secure gains, traders should be aware of the open exits. Exit strategies and other money management tactics can dramatically improve trading for both investors and traders by removing sentiment and lowering risk. Investors are encouraged to decide when they will sell for a profit and when they will sell for a loss before engaging in a transaction.
How does startup exit work?
Startup exits look different for business ventures and trade. Let us understand how:
For business venture – Successful entrepreneurs establish a startup exit strategy if operations don’t fulfill milestones. Most VCs want a thoroughly prepared startup exit plan before investing. Before beginning a venture, an entrepreneur should have an idea of startup exit and the business development choices that are influenced by it.
Suppose cash flow declines to the point that activities of the company are no longer feasible and an external financial injection is no longer possible. In that case, a scheduled shutdown and asset liquidation may be the best way to avoid future losses. Business owners or investors may also quit if another party makes a good offer.
IPOs, strategic acquisitions, and management buy-outs (MBOs) are some common startup exit strategies. An entrepreneur’s exit plan relies on several elements, such as how much influence or engagement they want to keep in the company and if they wish to continue operating in the same manner or alter moving ahead. Entrepreneurs desire appropriate compensation for their ownership stake. Valuation experts can assist business owners (and purchasers) assess a company’s financials to establish a reasonable value. Transition managers help sellers with exit plans.
For trade – Exit plans must be prepared and implemented when dealing with stocks and equities, whether for long-term holdings or intraday transactions. A winning trade should never change to a losing one.
You may exit a deal for a loss or a profit. Traders call exit orders take-profit and stop-loss depending on their nature. After taking a position, make all exit orders promptly. A transaction that fulfills its profit objective may be liquidated, or a trailing stop can be used to create a further profit. Investors should set a predetermined acceptable loss level and stick to a protected stop-loss for lost transactions.
Types of startup exit strategies
Here are the most common startup exit strategies a founder can choose to leave the business.
- IPO – A corporation “goes public” by selling shares in an IPO. Usually, the founder and leadership group remain, and day-to-day operations don’t alter significantly. Public companies face more regulations. Your shares could be locked up after an IPO. You can’t usually sell them for six months. If you need immediate cash, consider an acquisition.
- M&A – When two companies combine, they form a new firm. This benefits both firms. It may help companies reduce shortcomings and gain a competitive advantage. Though one firm is often bigger than the other, mergers typically occur as mergers and acquisitions (M&A). However, “horizontal” mergers between companies of the same size are also feasible.
- Acquisition – Acquisition is when business owners sell the firm. The buyer will pay for your company, sometimes with conditions attached, such as founders needing to stay usually between six months and two years, to aid with the adjustment. Usually, a bigger firm in the same sector will buy yours. A bidding war may ensue if many rivals want to buy your firm.
- Staff succession – In Silicon Valley, acquihires (acquisition + hiring) are prevalent. In this situation, the buyer is more interested in the staff, talent, and a sustainable development partnership. Acquihires often lead to the shutdown of production of goods and services and personnel receiving hiring bonuses in transfers. Acquihires occur sooner than significant startup acquisitions. Hence they contribute less funding to business angels and VCs.
- Liquidation – Not every firm needs to obtain money through investors, and not every startup has to be acquired to offer value to founders, staff, and investors. Companies with good business plans and scale can remain independent and reinvest the money. Part of the earnings might be delivered as a payout to investors, providing liquidity while avoiding public markets and their liabilities.
Why should you prepare a startup exit strategy?
A startup exit strategy has several benefits and should not be neglected by founders. It lets you decide when and conditions to depart from your company. Additionally, it facilitates a seamless transfer so your company may continue to prosper without you. Finally, it aids in maximizing the sale price of your company.
Some business owners start their venture with the intention of selling it. Others, though, choose to leave the project in the middle and go on to pursue other interests. A startup exit strategy streamlines the process of shutting down business activities and transferring ownership. To enhance the value of your pitch, you might incorporate it in your business plan. It will reassure them that they will still make money even if anything goes wrong or if your intentions for the business alter.
Therefore, an exit strategy is essential whether you want to scale up, sell, or buy a firm.
When should startups prepare for the exit?
Many entrepreneurs have planned for their startup exit from the beginning, possibly even to create a unicorn business. They founded the venture to make a profit one day by either selling the company’s ownership to investors or another business. But not all entrepreneurs have an exit plan, and other founders have no intention of leaving their businesses. There is no right answer on when founders should prepare for the exit; however, they must know, depending on the sector, a startup’s time to exit varies.
The right time to prepare for startup exit
The sector has considerable influence on how long a startup takes to exit. For instance, it takes hardware firms an average of 11 years to depart, compared to just four years for payment service providers.
- For SaaS companies – On average, SaaS startups received Series D capital, taking nine years from inception to exit. The average amount of money raised by SaaS startups to exit was $119 million.
- B2B focused companies – The median time for the departure of social networking, marketplace, and content distribution firms was seven years. Only six years have passed for the gaming industry, five years for e-commerce, and four years for the payment industry. Except for hardware, which has a significant R&D component, B2C firms often expand more quickly owing to their virility and the propensity for hot B2C startups to get much media attention.
- Older companies – Even if they were much smaller in size than their counterparts who go public today, companies that were founded before the year 2000 could depart quite quickly. In the 1990s, you could exit easily and in a short amount of time, but investors now want far more income, which takes longer to generate.
Top startups with a great exit strategy by industry
|Industry Type||Exit years 10th percentile||Exit years Median|
|Early Exit||Industry Benchmark|
|VETERINARY SERVICES FOR ANIMAL SPECIALTIES||5.99||9.39|
|CRUDE PETROLEUM & NATURAL GAS||4.21||11.49|
|DRILLING OIL & GAS WELLS||2.22||8.39|
|OIL & GAS FIELD EXPLORATION SERVICES||4.86||12.89|
|OIL & GAS FIELD SERVICES, NEC||4.43||12.99|
|WATER, SEWER, PIPELINE, COMM & POWER LINE CONSTRUCTION||2.47||13.93|
|PLUMBING, HEATING AND AIR-CONDITIONING||1.88||12.26|
|SPECIAL TRADE CONTRACTORS, NOT ELSEWHERE CLASSIFIED||1.92||26.55|
|MEAT PACKING PLANTS||3.08||12.43|
|BOTTLED & CANNED SOFT DRINKS & CARBONATED WATERS||4.09||10.61|
|FOOD PREPARATIONS, NOT ELSEWHERE CLASSIFIED||2.39||17.19|
|PACKAGING PAPER AND PLASTICS FILM, COATED AND LAMINATED||6.99||24.58|
|NEWSPAPERS: PUBLISHING OR PUBLISHING & PRINTING||2.16||4.04|
|PERIODICALS: PUBLISHING OR PUBLISHING & PRINTING||3.40||6.16|
|COMMERCIAL PRINTING, NOT ELSEWHERE CLASSIFIED||3.48||12.13|
|MEDICINAL CHEMICALS & BOTANICAL PRODUCTS||4.80||14.66|
|IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES||9.87||16.04|
|BIOLOGICAL PRODUCTS, (NO DISGNOSTIC SUBSTANCES)||4.78||8.77|
|SPECIALTY CLEANING, POLISHING AND SANITATION PREPARATIONS||4.44||9.73|
|PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS||5.66||12.34|
|CHEMICALS AND CHEMICAL PREPARATIONS, NOT ELSEWHERE CLASSIFIED||6.45||11.47|
|PLASTICS PLUMBING FIXTURES||5.99||18.66|
|PLASTICS PRODUCTS, NEC||5.73||13.34|
|STEEL WORKS, BLAST FURNACES & ROLLING MILLS (COKE OVENS)||4.64||14.82|
|STEEL PIPE & TUBES||4.03||11.26|
|HEATING EQUIPMENT, EXCEPT ELECTRIC & WARM AIR FURNACES||11.71||17.14|
|SHEET METAL WORK||6.82||10.50|
|COATING, ENGRAVING, AND ALLIED SERVICES, NOT ELSEWHERE CLASSIFIED||9.27||12.42|
|FARM MACHINERY & EQUIPMENT||5.79||24.04|
|MINING MACHINERY & EQUIP (NO OIL & GAS FIELD MACH & EQUIP)||5.02||7.21|
|OIL & GAS FIELD MACHINERY & EQUIPMENT||6.51||16.18|
|INDUSTRIAL TRUCKS, TRACTORS, TRAILORS & STACKERS||6.51||28.65|
|MACHINE TOOLS, METAL CUTTING TYPES||6.28||12.27|
|SPECIAL INDUSTRY MACHINERY, NEC||6.86||21.26|
|PUMPS & PUMPING EQUIPMENT||3.21||8.61|
|GENERAL INDUSTRIAL MACHINERY & EQUIPMENT, NEC||7.35||15.34|
|COMPUTER STORAGE DEVICES||5.81||14.70|
|COMPUTER PERIPHERAL EQUIPMENT, NEC||12.84||15.50|
|POWER, DISTRIBUTION & SPECIALTY TRANSFORMERS||8.78||12.01|
|TELEPHONE & TELEGRAPH APPARATUS||9.95||25.79|
|RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT||3.96||17.76|
|COMMUNICATIONS EQUIPMENT, NEC||6.27||14.88|
|SEMICONDUCTORS & RELATED DEVICES||3.15||18.76|
|ELECTRONIC COMPONENTS, NEC||2.80||27.01|
|MAGNETIC & OPTICAL RECORDING MEDIA||3.97||6.55|
|ELECTRICAL MACHINERY, EQUIPMENT, AND SUPPLIES, NOT ELSEWHERE||5.71||11.97|
|MOTOR VEHICLES & PASSENGER CAR BODIES||4.89||13.78|
|MOTOR VEHICLE PARTS & ACCESSORIES||2.83||6.97|
|AIRCRAFT PARTS & AUXILIARY EQUIPMENT, NEC||9.36||29.46|
|LABORATORY APPARATUS & FURNITURE||3.15||21.07|
|LABORATORY ANALYTICAL INSTRUMENTS||6.49||19.29|
|OPTICAL INSTRUMENTS & LENSES||8.26||16.55|
|MEASURING & CONTROLLING DEVICES, NEC||7.24||27.58|
|SURGICAL & MEDICAL INSTRUMENTS & APPARATUS||5.48||12.03|
|ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES||5.45||16.35|
|GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES)||5.69||14.52|
|SPORTING & ATHLETIC GOODS, NEC||3.72||7.84|
|MANUFACTURING INDUSTRIES, NOT ELSEWHERE CLASSIFIED||1.73||14.99|
|RAILROADS, LINE-HAUL OPERATING||6.72||19.05|
|TRUCKING (NO LOCAL)||9.11||25.47|
|GENERAL WAREHOUSING AND STORAGE||10.22||17.69|
|SPECIAL WAREHOUSING AND STORAGE, NOT ELSEWHERE CLASSIFIED||6.89||9.74|
|DEEP SEA FOREIGN TRANSPORTATION OF FREIGHT||4.29||15.08|
|AIR TRANSPORTATION, SCHEDULED||4.31||13.54|
|AIR TRANSPORTATION, NONSCHEDULED||9.21||21.12|
|CRUDE PETROLEUM PIPELINES||4.17||4.88|
|ARRANGEMENT OF TRANSPORTATION OF FREIGHT & CARGO||8.50||24.54|
|TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)||5.41||14.90|
|RADIO BROADCASTING STATIONS||5.38||13.81|
|TELEVISION BROADCASTING STATIONS||3.53||11.61|
|CABLE & OTHER PAY TELEVISION SERVICES||5.70||12.50|
|COMMUNICATIONS SERVICES, NEC||3.90||10.57|
|NATURAL GAS TRANSMISSION||3.56||11.52|
|NATURAL GAS TRANSMISISON & DISTRIBUTION||2.35||9.09|
|WHOLESALE-MOTOR VEHICLE SUPPLIES & NEW PARTS||3.72||10.95|
|WHOLESALE-LUMBER, PLYWOOD, MILLWORK & WOOD PANELS||8.67||12.50|
|BRICK, STONE, AND RELATED CONSTRUCTION MATERIALS||9.64||11.70|
|WHOLESALE-COMPUTERS & PERIPHERAL EQUIPMENT & SOFTWARE||9.19||16.45|
|WHOLESALE-MEDICAL, DENTAL & HOSPITAL EQUIPMENT & SUPPLIES||5.28||9.16|
|WHOLESALE-METALS SERVICE CENTERS & OFFICES||4.39||25.96|
|WHOLESALE-ELECTRICAL APPARATUS & EQUIPMENT, WIRING SUPPLIES||9.05||21.87|
|WHOLESALE-ELECTRONIC PARTS & EQUIPMENT, NEC||8.81||16.71|
|WHOLESALE-INDUSTRIAL MACHINERY & EQUIPMENT||4.11||11.02|
|SPORTING AND RECREATIONAL GOODS AND SUPPLIES||5.14||7.88|
|WHOLESALE-DURABLE GOODS, NEC||3.72||7.01|
|WHOLESALE-DRUGS, PROPRIETARIES & DRUGGISTS' SUNDRIES||3.27||6.71|
|FRESH FRUITS AND VEGETABLES||8.73||14.88|
|CHEMICALS AND ALLIED PRODUCTS, NOT ELSEWHERE CLASSIFIED||4.84||16.92|
|WHOLESALE-PETROLEUM & PETROLEUM PRODUCTS (NO BULK STATIONS)||2.29||10.37|
|RETAIL-LUMBER & OTHER BUILDING MATERIALS DEALERS||5.72||11.62|
|MISCELLANEOUS FOOD STORES||4.85||8.85|
|RETAIL-AUTO & HOME SUPPLY STORES||8.42||17.83|
|MISCELLANEOUS APPAREL AND ACCESSORY STORES||7.00||11.49|
|RETAIL-COMPUTER & COMPUTER SOFTWARE STORES||4.74||8.86|
|DRINKING PLACES (ALCOHOLIC BEVERAGES)||5.92||19.15|
|RETAIL-DRUG STORES AND PROPRIETARY STORES||7.28||14.13|
|RETAIL-CATALOG & MAIL-ORDER HOUSES||4.75||11.65|
|MISCELLANEOUS RETAIL STORES, NOT ELSEWHERE CLASSIFIED||4.78||9.64|
|NATIONAL COMMERCIAL BANKS||9.59||17.85|
|STATE COMMERCIAL BANKS||9.65||17.92|
|COMMERCIAL BANKS, NEC||4.93||12.72|
|SAVINGS INSTITUTION, FEDERALLY CHARTERED||4.96||10.35|
|SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED||4.38||9.13|
|FUNCTIONS RELATED TO DEPOSITORY BANKING, NEC||5.61||15.50|
|PERSONAL CREDIT INSTITUTIONS||5.47||11.85|
|MORTGAGE BANKERS & LOAN CORRESPONDENTS||2.81||7.84|
|SECURITY BROKERS, DEALERS & FLOTATION COMPANIES||4.33||13.39|
|ACCIDENT & HEALTH INSURANCE||3.19||17.90|
|HOSPITAL & MEDICAL SERVICE PLANS||6.35||15.74|
|FIRE, MARINE & CASUALTY INSURANCE||9.13||13.34|
|INSURANCE CARRIERS, NEC||5.03||22.93|
|INSURANCE AGENTS, BROKERS & SERVICE||5.47||12.49|
|REAL ESTATE AGENTS & MANAGERS (FOR OTHERS)||2.81||9.05|
|OFFICES OF BANK HOLDING COMPANIES||9.98||26.38|
|OFFICES OF HOLDING COMPANIES, NOT ELSEWHERE CLASSIFIED||1.02||4.02|
|REAL ESTATE INVESTMENT TRUSTS||4.46||11.29|
|FUNERAL SERVICE AND CREMATORIES||4.37||8.68|
|ADVERTISING, NOT ELSEWHERE CLASSIFIED||6.67||8.88|
|SERVICES-EQUIPMENT RENTAL & LEASING, NEC||5.87||15.30|
|SERVICES-COMPUTER PROGRAMMING SERVICES||3.82||15.42|
|SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN||5.85||13.45|
|SERVICES-COMPUTER PROCESSING & DATA PREPARATION||4.42||14.84|
|INFORMATION RETRIEVAL SERVICES||4.94||13.29|
|COMPUTER RELATED SERVICES, NOT ELSEWHERE CLASSIFIED||3.41||8.45|
|SECURITY SYSTEMS SERVICES||5.49||20.13|
|SERVICES-BUSINESS SERVICES, NEC||8.53||18.79|
|SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION||2.92||9.66|
|SERVICES-MEMBERSHIP SPORTS & RECREATION CLUBS||4.37||8.83|
|AMUSEMENT AND RECREATION SERVICES, NOT ELSEWHERE CLASSIFIED||3.78||12.49|
|SERVICES-SKILLED NURSING CARE FACILITIES||7.48||17.82|
|NURSING AND PERSONAL CARE FACILITIES, NOT ELSEWHERE CLASSIFIED||7.30||14.21|
|SERVICES-GENERAL MEDICAL & SURGICAL HOSPITALS, NEC||5.66||12.31|
|SERVICES-HOME HEALTH CARE SERVICES||5.54||11.39|
|COLLEGES, UNIVERSITIES, AND PROFESSIONAL SCHOOLS||8.79||16.29|
|SCHOOLS AND EDUCATIONAL SERVICES, NOT ELSEWHERE CLASSIFIED||7.60||19.18|
|ACCOUNTING, AUDITING, AND BOOKKEEPING SERVICES||3.96||10.30|
|SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH||3.33||10.75|
|SERVICES-MANAGEMENT CONSULTING SERVICES||6.35||9.02|
|SERVICES-FACILITIES SUPPORT MANAGEMENT SERVICES||4.31||16.53|
|BUSINESS CONSULTING SERVICES, NOT ELSE WHERE CLASSIFIED||2.07||8.21|
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