Selling a Business
Does Your StartUp Need an Exit Plan?
Written by James Garvin for Gaebler Ventures
It's hard enough to plan and accurately forecast the financial projections for a start-up, which is why so little weight is often put on the actual business plan presented to venture capital firms. However, a common question and potential problem faced by entrepreneurs, is the exit plan. Venture Capitalists and investors want to know what their expected rate of return will be on their investment which means that you'll need to know not only what your exit strategy will be, but when it will occur.
The need for an exit plan seems to be mixed from investors.
Since most VC's tend to discount the accuracy of financial projections in a business plan, they to will discount your ability to accurately forecast a planned exit. Rather, investors will focus more on the likelihood and probability of your firm being able to reach a certain size within a certain time period. If your firm has a high degree of probability for high growth and profitability, many investors assume that once growth milestones are achieved that an exit with an attractive rate of return is inevitable.
Just look at still private firms like Facebook who have kept their investor money private for much longer than many anticipated. However, a public exit via an IPO is inevitable for Facebook and investors will ultimately be rewarded with a handsome exit. When Facebook initially secured venture capital, they weren't pitching an exit, they were pitching the ability of Facebook to become the most popular website in the world (which they just surpassed Google). With that sort of promise, a handsome exit for investors is inevitable.
If you are pitching to investors, it may be worthwhile to talk about your "proposed exit plan" with the contingency that this is very much up the in air as with everything else with your business. However, it indicates to investors that you and your founding team are thinking about an exit. The anticipated exit requires very different strategies from the early stages of a business. If a firm requires an IPO as an exit, as many early-stage biotechnology and medical device companies than their strategy is solely focused on building a sound R&D strategy and entering into clinical trials as soon as possible.
Firms that are not as dependent on early R&D investments to fund later profitability will have other early-stage strategies more likely focused on revenue growth. The faster you grow your top line, the faster your valuation increases (just look at the .com bubble in the late 90's). Many entrepreneurs seeking funding think that they have to pitch their potential investors on their exit plan. Most new ventures state that they will be acquired by a competing or complimentary firm within 5-7 years of starting. That "exit" event usually never happens as planned and can therefore almost never accurately be planned for, but is should be prepared for.
Rather than focusing on trying to predict a future outcomes such as acquisition, focus on selling the numbers and growth that your business can achieve to potential investors. State your desired exit plan, such as we don't want to do an IPO, we would rather be acquired by a strategic partner and thus we will be seeking formal partnerships with potential acquirers early on in our venture to build those relationships. Leave the quantitative numbers out of the presentation, but show that you are committed and have prepared for an exit at some point in the not too distant future.
James Garvin began his education studying biotechnology. In recent years he has turned his interest in technology to helping two internet startup companies. The first business was an online personal financial network and the second was an e-marketing platform created to help entrepreneurs demo their web sites. Currently a student at University of California Davis, James is spending his summer incubating two new online businesses and writing about his entrepreneur experiences.
Share this article
Additional Resources for Entrepreneurs