We touch on this apparent irony in the article “How Much Capital Should I Raise?” The short answer is that investors value liquidity. What is liquidity? It’s the ability to convert an investment to cash so that it can be used for other things: invest in something else; pay for college; buy a house; buy a boat; or go on vacation..
If you don’t have an exit strategy, an investor has less certainty about when they might get their principal back let alone any returns on their investment. You may be very certain that your company is going to be so successful that it would be crazy for anyone to ever want to exit their investment and that you expect that all investors should be thrilled to stay forever, basking in the riches that are coming their way.
The reality is that, even if this dream comes true, investors want to get their money out. Venture capitalists want a 30-times return on their successful investments so they can offset the losers, but they also have an obligation to return their investors’ money within a certain time frame. They don’t have the luxury to go along for the ride no matter how high the ride may take them.
Mark Cuban once said on Shark Tank in 2020 something to the effect that he doesn’t like when entrepreneurs have exit strategies because it indicates to him that they aren’t fully committed. On the other hand, many investors think that having an exit strategy is a red flag that an entrepreneur is naive and unprepared for reality or ignorant of the needs of their investors for a return of their principal within some number of years. Entrepreneurs can assume a middle ground on this issue. They can say that they look at building their company as fulfilling a dream, and they have no interest in leaving, but they understand that investors often need liquidity. They can explain that the two are not mutually exclusive. “I don’t want to build this company up just to sell it, but I am open to selling it if I can stay on.” Of course, some buyers may not want you to stay on, but most strategic acquisitions are buying the talent primarily and the business secondarily. There is a good chance that you will be able to stick around after a sale or other form of exit.
A Good Strategy for Exit Strategies If you are in a position to do so, the best strategy I have heard for developing an exit strategy is to ask potential buyers (down the road) what would motivate them to consider purchasing you. Ask, “What would I have to achieve in order to be an attractive acquisition target for your company?” Of course, this implies good access to executive at potential suitor companies who are willing to consider your question. It also implies that such an executive would have the foresight to place a value and maybe even some Key Performance Indicators on your company’s performance. In you lack such access, you may have to make an educated guess. Either way, if an investor asks what your exit strategy is, it will pay for you to consider these questions. Even if you don’t have a definitive answer, you might demonstrate that you are mindful of the investors’ needs and that you don’t plan to hold on to their investment indefinitely.