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Startup Exit Strategies – When and How to Maximize Your Exit

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When a startup begins leveraging investor capital, an eventual exit is inevitable. A startup with no exit strategy will minimize investor returns, and strategically growing towards a successful business exit strategy for its investors needs to be planned for years in advance.

Still, when the time comes, you may have several options available to you, and sometimes the time may just not be right. For example, you can read this story of startup founder Alex Turnbull who turned down a $12m acquisition offer of his early-stage startup after he projected that his business would be worth far more within a handful of years. 

All business ventures need to be well-versed with the various exit strategies available to them and make sure they are seen as lucrative to potential buyers and investors. We’ve worked with several startups as a financial consultant from cradle to grave, and offer some basic guidance here to get your wheels turning.

When is the right time to make your exit?

There is no one size fits all approach to business exit timing. Crunchbase compiled the average exit time for 127 tech businesses, and noticed some industry trends:

  • The median exit time for payment companies such as Square and Paypal was 4 years.
  • The median exit time for social media, marketplace, and content distributors was 7 years.
  • The median exit time for eCommerce businesses was 7 years.
  • The median exit time for SaaS companies was 9 years.
  • The median exit time for hardware companies was 11 years.

There will reach a point where you’ve matured enough that raising more capital is no longer an option and it will be time to bring in return for your investors. In general, the best time to make your exit will always be when you don’t necessarily need or want to. It will be a time when you’re riding high, and you’ll have several options to make a successful exit - and have the luxury of turning down some offers, to boot. 

However, there may also be times when you are better off selling your company when it is less valuable, but you own a higher percentage of stock. You’ll have to consider all of the circumstances of your venture and make a decision based on that.

Types of Exit Strategies

Mergers and Acquisitions (M&A)

Getting acquired is a best-case scenario where both you and your investors can make a lucrative payday. Your company’s valuation will be based on several key factors:

  • If your company’s products or services and geography can help fill in a market or product gap for the acquiring business
  • If the  acquirer wants to outbid a competitor for your business
  • If your company’s talent meets the needs of the acquirer
  • If there are theoretical synergies between your businesses
  • If you’re doing better than the acquiring business in the same marketplace

When courting different offers, it’s important to bring experienced negotiators to the table who can help you leverage all of these factors to get the best offer possible. 

Initial Public Offering (IPO)

A mature and established venture capital-backed company may also take the IPO route to raise capital and give their shareholders liquidity without having to sacrifice ownership and sell your legacy.

The traditional IPO is a fairly straightforward and organic process, though it can involve a good deal of due diligence. This is generally considered the way to take your company to the next level.

Traditional IPOs use entities called underwriters to take on a portion of the risk - these underwriters act as intermediaries during the selling of the shares. However, this process can end up costing a significant amount of cash (often up to 7% of cash raised to the investment bank alone, not to mention fees for lawyers and accountants). The IPO window is also long, requiring you to plan 12-18 months before the formal process even begins.

Given how long and costly this window is, many business owners are instead looking to SPACs to make their exit. After all, a faster IPO makes it easier to cash in on the hype.

Special Purpose Acquisition Companies (SPAC)

A SPAC is a shell company - it’s an entity that is created not for the purpose of commercial operations, but rather strictly to raise capital for a traditional IPO. The capital raised is then used to acquire an already existing company. As a shell company, a SPAC doesn’t need to have assets other than cash when it goes public, and the window from inception to purchase is only 2 years. 

When it comes to SPAC vs. IPO, the fact of the matter is that the shell company SPACs are a lot faster and more nimble than traditional IPOs. The SPAC model is alluringly simple - unlike with a traditional IPO, you can start seeking investment capital right away, and decide where it’s going to go later. 

SPAC investors are willing to hop aboard this wild ride because they’re assuming they’ll get something out of it - even if what they do get ends up being a surprise! Worse comes to worst, they can simply redeem their shares. 

Recently there have been some high-profile SPAC startup exit strategy examples such as BuzzFeed and Virgin Galactic.
It is also worth noting, however, that the SEC is cracking down on SPACs and implementing regulations to protect investors.

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