Planning a business exit strategy for your startup

An exit strategy holds significant importance for business owners, yet it is frequently relegated to the back burner until circumstances demand major changes. Neglecting to establish a well-thought-out exit strategy that guides the course of your business can potentially restrict your future business growth. To safeguard the future of your business and secure the best possible outcome, it’s essential to proactively devise your exit strategy long before the moment arrives.

In this article, we’ll guide you through the process of identifying the exit strategy that aligns best with your company goals and investor expectations. We’ll also delve into the essential considerations you should bear in mind before implementing your chosen exit strategy, as well as real-world business exit examples.

What is an exit strategy?

An exit strategy is a planned approach to selling or transferring ownership of a startup once it reaches a certain milestone or value. This crucial aspect of a business plan outlines how both entrepreneurs and investors can recoup their investments and reap the rewards of the risks taken. Incorporating considerations like employee stock options or equity early in the exit strategy ensures that the interests of key stakeholders are well accounted for, promoting an equitable transition.

Common exit strategies include mergers and acquisitions (M&A), selling to a strategic acquirer, or initial public offerings (IPOs), each providing a clear roadmap for the future and ensuring financial security.

A well-thought-out exit strategy can significantly enhance a startup’s attractiveness to investors, who often look for a defined path to a return on their investment. By planning an exit, startups can better navigate the business landscape, ensuring sustained growth and a successful transition when the time is appropriate. This structured approach aids in fostering a positive organizational culture and paves the way for a smooth transition, benefiting not only the owners and investors, but the entire organization.

Understanding exit strategies

An exit strategy is a well-structured approach that equips a company to navigate a spectrum of future scenarios while sustaining its competitive edge during transitions from one phase to another. This plan serves as a roadmap, enabling the company to methodically and systematically progress toward its exit point while capitalizing on all available prospects.

An exit strategy is often a prerequisite when raising venture capital funding or seeking angel investments. Angel investors typically require a clear understanding of your potential exit plan to gauge when they might expect a return on their investment and what that return could potentially entail.

How common are successful exits?

While approximately 90% of startups ultimately fail, research conducted by Startup Genome reveals a striking statistic: only 1.5% of startups, which equates to approximately 15% of those that manage to sustain themselves, achieve a successful exit valued at $50 million or more. This phenomenon is notably observed across the top eight startup ecosystems in the United States.

Interestingly, according to a report by CBinsights published in 2023, in the global startup exit landscape, Europe has led the way, accounting for 38% of exits. The United States is a close second, with a 35% share. Meanwhile, Asia saw 16% of exits.

However, it’s worth noting that the overall number of exits has been gradually decreasing post-pandemic, indicating ongoing challenges in the market, especially for investors seeking liquidity. This emphasizes the importance of having a sound exit strategy, as it not only benefits the entrepreneur but also plays a crucial role in investor relations and the overall success of the startup.

Why is an exit strategy important for your startup?

An exit strategy’s primary aim is to empower companies to craft and execute growth plans with precision. This strategic approach equips businesses to identify, prepare for, and execute tasks that yield maximum advantages. Some of the benefits of planning a well-designed exit strategy include:

• Clarity and direction. A startup exit strategy provides a clear and well-defined plan of action for the company, enabling timely decisions in a changing business environment.

• Opportunity planning. An exit strategy helps companies plan for new opportunities and develop strategies to capitalize on them.

• Internal alignment. An exit strategy helps establish linkages between different departments and form a coherent vision of future growth, ensuring that all initiatives and plans are heading in the same direction.

• Business fitness. An exit strategy keeps the company in shape, keeping it strong and productive while also ensuring that new opportunities are constantly pursued.

• Continuous growth. An exit strategy provides a framework for growth within the business and ensures that the right measures are taken on a continual basis. This means that the company will be able to make the most of the opportunities it encounters in different situations.

When should a startup prepare an exit strategy?

A startup should begin preparing an exit strategy from its inception, as having a clear exit plan is often perceived positively by investors and can help in attracting initial funding. The exit strategy should be part of the startup’s business plan, depicting a clear roadmap of how investors and founders can recoup their investments and potentially earn a return. Early planning doesn’t mean an early exit; rather, it reflects foresight and preparedness which are essential in navigating the uncertain waters of entrepreneurship.

It’s also important to remain flexible, as the chosen exit strategy may evolve over time based on the startup’s performance, market conditions, and other factors. Moreover, early preparation of an exit strategy allows for better decision-making, aligns the interests of founders and investors, and sets a clear vision for the future, which can be instrumental in guiding the startup towards achieving its long-term objectives.

Types of exit strategies

Navigating the myriad pathways of exit strategies is crucial for startup founders and investors eyeing a fruitful transition. This section delves into various types of exit strategies, shedding light on how each aligns with different business models and long-term objectives, thus providing a roadmap for a successful exit.

Mergers and acquisitions (M&A)

M&A deals are when two or more companies combine to form a new company, or when one company acquires another company. M&A deals can be a great way for startups to gain access to new markets, resources, and expertise. However, according to a recent report by CB Insights, M&A deals continued to decline by 8% in the global startup ecosystem.

Initial public offerings (IPOs)

An IPO is when a company sells shares of its stock to the public for the first time. IPOs can be a great way for startups to raise capital and increase their visibility. According to a report, the global IPO market is showing a consistent rebound, with a substantial 24% increase in the number of IPOs. However, IPOs can be complex and expensive, and they are not suitable for all startups.

Family succession exit

Family succession is the process of passing a business down to the next generation. This can be a good option for founders who want to keep their business in the family. However, it is important to make sure that the next generation is prepared to take over the business.

Selling your stake to a third-party

This is when you sell a portion of your ownership in the startup to another investor. Selling your stake can be a good way to raise capital or to cash out of your investment.

Acquihire

This is a process wherein a larger company acquires a startup primarily for its talent and intellectual property. Acquihires are often a good way for startups to exit and for their employees to find new opportunities.

Management Buy-Out (MBO)

An MBO is a transaction in which the management team of a company purchases the company from its existing shareholders. MBOs can be a good way for management teams to take control of their own company and to create value for themselves and their employees.

Liquidation or bankruptcy

Unfortunately, not all exits are favourable. Liquidation is when a company sells off its assets and ceases to operate. Liquidation is often a last resort, but it may be necessary if a startup is unable to raise capital or generate enough revenue to stay afloat. Similarly, bankruptcy is a legal process in which a company is declared insolvent and its assets are liquidated. Bankruptcy should be avoided whenever possible.

The best exit strategy for a startup will depend on a number of factors, including the company’s industry, stage of growth, and financial condition. It is important to carefully consider all of the options before making a decision about how to exit your business.

Real-world examples of exit strategies

Exploring various exit strategies offers a glimpse into the diverse pathways startups can take towards achieving liquidity or further growth. These cases illustrate how exit strategies are tailored to the unique circumstances and ambitions of each company, reflecting a critical juncture in their respective journeys.

Atlassian’s acquisition of Loom

Atlassian, a notable Australian software company, acquired Loom, a pioneering platform in asynchronous video messaging, for approximately $975 million. This acquisition was a strategic maneuver aimed at bolstering Atlassian’s team collaboration tools, aligning with the rising trend of hybrid work and virtual communication. Loom’s video messaging tool aids in instant communication through shareable videos, a feature that was seen as valuable by Atlassian which was one of Loom’s earliest adopters.

Airbnb’s initial public offering

Airbnb launched its IPO in December 2020, amidst the global challenges posed by the COVID-19 pandemic. The company aimed to raise approximately $2.44 billion from the sale of its Class A stock, setting the IPO price at $68 per share. On the day of its IPO, Airbnb’s share price soared, opening at $146 and peaking at $165, before closing at $144.71, thus marking a remarkable rise of 113% from its IPO pricing, and pushing the company’s valuation past $100 billion​​.

Twitter’s acquihire of Squad

In December 2020, Twitter acquired Squad, a social audio app, to bolster its product, design, and engineering teams, highlighting a form of exit strategy known as acquihire. The entire Squad team, including the CEO Esther Crawford and CTO Ethan Sutin, joined Twitter’s ranks, bringing their expertise to accelerate Twitter’s product development. The acquisition, which led to the shutdown of Squad, was part of Twitter’s strategic move to enhance its platform by integrating Squad’s social audio features, aligning with the increasing trend of virtual interactions amidst the pandemic era.

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