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Top 11 startup exit strategy that investors can make money

startup exit strategy

Top 11 Startup Exit Strategy for Investors to Make Money

You are a founder of a startup and investors invested huge money in your startup. But after one or two years you may experience the bad face of the world and you can try to sell your business to another company to reduce your losses. Or this situation can be reversed. Within a few years you have made a successful startup company and you are getting many offers from big companies to acquire your startup with a big amount of money. If you sell or transfer your startup business in both of the company’s good or bad situations it will be an exit strategy for your startup to return the investors’ money.

What is startup exit strategy?

Startup exit strategy is a procedure of transferring ownership of your startup business to a third party to get return on the money that founders and investors invested in the business. A proper startup exit strategy helps founder to make right decision on time. What should you do when your startup company will fail or what should you do when your startup company will achieve success? If you make a strategical plan now for your startup exit strategy it will help you in the future of your business.

Who needs an exit strategy for a startup?

A clear exit strategy is essential for anyone who is looking for venture capital funding or angel investment. 

Normally investors don’t look for an exit in the starting time of a startup, but after 5 or 7 years they will get anxious if they can not liquidate their money. 

It is very wise to plan early how you will transfer ownership of your startup. In future you can sell it or scale the business to be acquired.

Why planning exit strategy is important

A new business person always needs to think about how it will end for a new startup company. Most of the time investors ask the startup owner “What is your exit strategy?”. If your answer is satisfying to the investors then you have a high scope to get the fund. So you have to make your answers ready before anyone asks. Identifying a proper exit strategy is important for different reasons:

An exit action is required for good investment gain. Equity investments have no advance recompense period or interest installments like credit. Equity investment is stock but it has no market value until the company goes public or is sold or merged with another company. It takes time at least three to five years.

If a startup has no exit plan then investors returns are reduced. Investors can not take decision to invest when an entrepreneur plans to grow the company into a family business.

Making contribution in startup is more interesting than a big company role for founders. Most founders love the fun of a startup turning into managing production, sales and personnel in a few years. Make an exit plan before your company turns into a giant company. Because with the growing of the company your interest can lose. So you have to be prepared for your next startup journey by planning your exit strategy.

Startup Exit Strategies for Investors

First make a business model then then plan a exit strategy of your business. Startups are purchased by investors because they have a potential to make money for the company in future.

There are different types of exit strategies that investors and entrepreneurs can choose to get the return from their investment. They are:

  1. Initial Public Offering (IPO)
  2. Mergers and Acquisitions (M&A)
  3. Selling the stake to an investor
  4. Management and employee buyouts
  5. Family succession
  6. Liquidation
  7. Acquihires
  8. Milking the cow
  9. Regulation A+
  10. Venture Capital
  11. Bankruptcy

Initial Public Offering (IPO)

Initial Public Offering (IPO) is a popular exit strategy where a startup sells a part of its business to the public in the form of shares. IPO is perfect for the companies who have already gained traction or become large corporations.

IPO is a best option for larger and more established companies due to its complex process and high risks. That’s why you need to be careful when assessing your startup whether your startup is ready for this type of startup.

As per the National Venture Capital Association statistics, only 16% of venture-backed startups recently used this strategy because it has high liability concerns, demanding shareholders, and high costs. Most of the experts don’t recommend this strategy for risk process.

Bumble, Roblox, Compass, Coinbase, AppLovin, Robinhood, Freshworks, Warby Parker, GitLab, Udemy, Rivian are some most fascinating IPOs of 2021. Reddit, The Fresh Market, Discord, Databricks, Ascensus, Instacart, ThoughtSpot are hot new IPOs to look for in 2022.

Mergers and Acquisitions (M&A)

Mergers and Acquisitions (M&A) is a contract with your company to be merged with another organization. If you face problem with cash flow and liquidity of your business then this exit strategy is useful for your company. 

It’s a win-win situation for both the companies. You as well as your investors require money to cash out. On the other hand the other company wants to increase their geographic footprint acquiring your talent, infrastructure or product to eliminate the competition. 

M&A is a powerful exit strategy for business owners. Be prepared before making this decision because these processes are time-consuming and costly.

Selling the stake to an investor

You are not the sole business owner for that reason you can sell your stake to a venture capital investor or a trusted partner. ‘friendly buyer’ word is used in this type of exit strategy because you need someone trusted to sell your stake.

It’s an another exit strategy of M&A to manage a private offering of the business’ shares to individuals or a select group of investors to raise funds. This is very cost effective because brokers are inessential in this case. But searching a buyer or investor for your share of the company can be tough and challenging.

Management and employee buyouts

You have built your own business empire and you want to see it’s legacy carried on  long after you’re gone, you may want to think about your employees to buyout your company. The employees who are working from the beginning of the company and very well-versed and experienced about company culture and corporate goals are able to fill up the more senior leadership gaps. 

As your high performing team is already well-knowledge with your business, they should be capable of running the company. You will have a trust that the business is being run by someone experienced in the company.

You can deliver your business to the family members but there is a risk that they are not knowledgeable about the business properly as they are not involved from the start of the company.

Family succession

Already told, delivering the business to the family members is slightly risky if they have a lack of understanding about your business. But if the family persons have a dipper knowledge and understanding of your business then they will be the best people to authorize the business to them.

The family succession exit is a inheritance exit which is the great idea of keeping a moneymaking business ‘in the family’. It is the best option for those who want to deliver their company legacy to a child or family member.

Liquidation

When a company is in a situation they have no way rather than declaring, bankruptcy liquidation is the one of the best options for a startup or small business. It’s a familiar exit strategy for the company which is close to failure.

If you are alone managing your business and no family members are interested or capable of taking over you can close your business by selling all of your assets like land, equipment, and so on.

However, money received by selling assets would certainly go to creditors first then to the shareholders if there are any. Liquidation is not a high-value exit. It will stop you from losing excess money.

Acquihires

If a company is bought by anyone to acquire its talent totally then it will be called acquihires exit strategy. It can be very advantageous to expert employees when you are confident that your employee will be well looked after once the business itself is sold.

If anyone is determined to acquire your talent, you will be able to negotiate firmly of the acquisition. In this condition your employees will enjoy a more particular and prosperous future in their career.

Milking the cow

When you are fit enough to survive in the market with your own business revenue and competent enough to pay dividends to investors and shareholders by selling their products then you need not raise money from VCs and business angels.

You have a current moneymaking business and you are managing it with your own cash or profit, it is called the term 'Milking the cow'. Rather an exit strategy, these startups try to increase sales. If they want cash they can give a superior offer to their existing investors to re-invest into the business.

Regulation A+

Regulation A+ is an alternative model of an IPO. At present, this regulation allows the business owner to put your startup company on an exchange after qualifying. The business persons are benefited from escalating money and fulfilling the particular requirements laid down by the Securities and Exchange Commission (SEC) without publishing accounts publicly or file other necessary papers that would be needed for an IPO.

Venture Capital

A finer way to secure investors is to keep the cash wheeling into the startup. Venture capitalists usually invest a big amount into startups that are really useful for the company. It needs enough time for the investment to grown-up, it is able to provide a stable source of cash to create more money, expand development, and attract other rich investors who see the scope of high returns in the future. Nowadays, real estate crowd funding companies are going into the venture capital route.

Bankruptcy

No one want to include bankruptcy as exit strategy in the business plan. But If it is happened that your business is filed for bankruptcy then it will result in assets seized and will impact your credit, but it will also free you of financial debts. You’ll be relieved from the debts and responsibilities of your organization. But it will be very difficult for you to borrow credit in future to start your new startup.

Planning an exit strategy will help your investors to liquidate their investments as well as to secure the value of your startup. Investors may want to know your startup exit strategy before they invest their money. It is a strategic approach to develop the best moment for you, your startup, and your investors. Exit of a business can be the end of your startup journey, but it should be the beginning of a more grown-up and durable business.

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