It would not be an overstatement to say that I have reviewed more than 2,000 business plans prepared by startups in different stages of development as a result of my involvement with different investment networks, with technology conferences such as eMerge Americas, and with business plan competitions organized by The Miami Herald and universities such as FIU and FAU.
It amazes me that the one significant common denominator that I see across the board is the lack of understanding of what an “Exit Strategy” is. It is not unusual for me to see pitch decks where the Exit Strategy slide simply reads “will be acquired by Google in 5 years.” Not even friends who have invested in tons of companies have a real grasp of the meaning. The startling thing is that if you can advance a sound exit strategy, it can have a tremendous impact on focusing the direction of your business; helping prioritize investments; and even driving other elements of the design of the company, from the start.
Not everyone pursues an Exit Strategy as their ultimate goal. Most companies are created to sustain the founders with their ultimate goal of maintaining an acceptable lifestyle and providing a legacy for their family. For these companies, if an exit comes, it is usually unplanned. However, there are a number of companies that raise capital from investors. The moment a founder of a company takes money from an investor, the “exit” becomes the overarching strategy for that company. Although there are exceptions to this, typically the investor and the founders are joined in achieving the windfall resulting from a company exit.
The Exit Strategy becomes the overarching strategy of any invested company by definition and its understanding should drive the design of the company from the get go.
As much as I reflect on this topic I can only think of five possible exit scenarios. If you can identify more than these please let me know, although I would argue that most will be a deviation of these five. Many times an exit is a result of a combination of these scenarios.
IPO (Initial Public Offering). This is when a company begins to trade its shares publicly. I list it here because it is an exit, but the chances of this happening are so improvable that most investors don’t consider it as a possibility and it should be discounted by any entrepreneur as they develop their plan. Just to support this statement with numbers, it is estimated that over 400,000 new businesses were started in the U.S. in 2012, and the number of IPOs in that year was only about 102.
IP (Intellectual Property/Technology). This is when a company gets acquired because they have been able to achieve significant advances in research and development that provide significant barriers of protection, or that it would take the acquirer significant investments in money and time to replicate. You would typically expect to see a number of these occurrences around medical devices, pharma drug development, and a number of niche technologies. A good example of a company being acquired for its technology in our own South Florida would be Mako Surgical.
Traction. This is when a company gets acquired because it has been able to develop a book of customers (users) that would be attractive to the acquirer as it would complement the acquirer’s own book, or in cases where the cost of customer acquisition is significant. Examples of this were acquisitions by cable and wireless companies that would calculate company acquisitions on the basis of cost-per-customer. This is why we see companies with little or no revenue but with huge traction such as Whatsapp and Instagram being acquired for huge valuations.
Cash flow/revenue. The cash flow or the revenue that a company throws on a yearly basis can be attractive to a buyer. This is probably the most common reason why a company gets sold or bought.
‘Acqui-hire.’ This is when a company gets bought out because of its unique team. The buyer is acquiring the team and not the company, per se. It happens a lot within the University system and with pharma. This exit should also be discounted from any business plan.
If you have a good and realistic understanding as to why your company could potentially be acquired, it allows you to focus on the priorities that will be the most helpful and efficient in achieving this overarching goal, and to ultimately articulate this to your team, customers and potential investors.
For example, if you are developing an e-commerce destination, it is unrealistic to expect that you will be acquired as a result of your technology prowess, so it is probably useless and a very inefficient use of your time, talent and scarce resources to develop a platform from the ground up. A much more efficient use would be to simply aggregate technology and only develop the features that are key to your success. Your efforts should rally around building revenue.
And if your business is about social media, don’t distract your efforts by trying to build an unproven revenue model. Your efforts should be concentrated in obtaining traction. A lot of investors tend to think that having a revenue model is a requirement to success. I see many plans with unrealistic and unachievable revenue streams that are the results of such a mythical requirement. I believe that in certain cases, it is all about the number of users, and the business model is about having the lowest customer acquisition cost possible. I accept that this may take some educating.
If you now understand my drift and have a good idea of what can be your truthful exit scenario, then the next step is to understand who the possible realistic acquirers of your company can be. If you are a social media player and know that Google focuses their acquisition strategy around IP/technology, then most probably, no matter what you do, you will be of no interest to them. But if you are on your way to achieve significant traction, then identifying the number of companies that make acquisitions in your space should be fairly easy. The “exit strategy” is the knowing who that realistic potential acquirer is and the how to become visible to that acquirer. And achieve that visibility by focusing Marketing & Sales strategy towards that overarching goal. This means that if you are in the business of manufacturing hot dogs, and your possible acquirer is Oscar Mayer, make sure that you distribute your products through the same distribution channels.
Understanding and developing an “Exit Strategy” is by no means an easy task. It took me years of looking and planning and many personal experiences to finally get it. I hope that this article helps you in developing your own.
Ricardo Weisz is founder and president of NorthVest Company, which provides equity capital to early-stage entrepreneurial companies in Florida. He can be reached at firstname.lastname@example.org and at 305-903-3088.