Ahh…liquidity…one of the reasons that entrepreneurs start companies and usually the only reason why investors put in capital.
Exit strategies are often discussed during the early-stage lifecycle since both parties want to know how they are going to make money. Generally upside exit strategies fall into 2 categories: an initial public offering (IPO) or an acquisition/merger. I say generally because there are some other tangential ways to become public such as a reverse merger, but that is a completely separate story and deserves its own post. Of course there are downside exit strategies like asset sales, bankruptcy or simply shuttering the company, but we are all about upside in this article!
There is no single right answer for the question, “what is your exit strategy”? The reason is, exit strategies are dependent upon so many different factors such as the state of the company, IPO market conditions, company brand, sales, available & interested suitors and more. Even though entrepreneurs would like to believe they know which exit strategy they are going to pursue, generally it’s better not to address this too early in a company’s lifecycle.
For instance, an entrepreneur might say that they believe an IPO is their preferred exit. First, what happens if a suitor comes out of nowhere and wants to buy the company prior to the IPO, and makes a significant offer? Or, second, what if market conditions are not correct for an IPO when the company wants to go public? Thus any early exit promises could be viewed as exaggerated or even showing too much entrepreneurial naivete.
When people asked me about an exit strategy I tell them “IPO or acquisition in 3 to 5 years”. This gives the entrepreneur leeway to make the right moves with the Board of Directors to gain optimal shareholder value or at least make the best of the situation at that time and under those conditions, without delivering a promise that may be hard to fulfill.
As mentioned above, exit strategies are hard to predict. I have found that exits become obvious when they are good enough to pursue. In other words I would not chase exit strategies, let them chase you. If you find yourself looking for exit strategies, most likely you’re not going to find a good one. Additionally, if you focus too much on an exit strategy while the company is at an early stage, investors may believe that you are not really interested in building a company, but rather just making money for yourself. It will be hard to create a successful exit without creating a viable company, so stay focused on building your company.
Now if you have completed mezzanine financing and are working with an investment bank to take your company public, you’re probably approaching a point where you have or are soon going to file an S-1 with the SEC, and then are going to build distribution with the bank and get ready for the IPO, depending upon market conditions. Or if you’re in late stage negotiations with a suitor who wants to acquire the company, then you probably could discuss possible acquisition with your board and selected investors. But early on its best simply to avoid any specific answers.
Additionally, some businesses are better off not being acquired or going public, but rather operating as a private company and paying dividends to their existing shareholders. There are plenty of private businesses that have quarterly or annual distributions to shareholders that are perfectly fine operating in that fashion.
Lastly, it’s best not to continually discuss specifics on exit strategies because there is a chance that the company will not be as successful as initially planned. Most small businesses fail, that’s a fact. So as an entrepreneur, avoid discussions around guaranteeing future results to avoid future problems. Having been an officer of a public company, you learn how to keep your mouth shut about any futures. With private companies you can hint towards an exit strategy, but then leave it alone.
Focus on operating your company profitably, and you will have plenty of opportunities for exit strategies, and even if you don’t, you will be able to profit share with your investors.