You’ve just completed a great investor pitch with heads nodding and good interaction. You’re about to ask “Does this opportunity interest you enough to explore an investment?” when instead you get a final question: “One final question. What is your exit strategy?”. Oops, the last two times you got this question you were met with a sour look. The first time you wanted to show you aren’t looking for a quick-flip and so you answered something like, “We’re not even thinking about selling the company or doing anything crazy like an IPO”. The next time you decided to show the investor you want everyone to get a payday and so you answered something like, “We’ve already identified six companies that surely will want to acquire us as soon as we’ve reached $5M in revenue. They are A, B, C, D, E and F”. In this blog post I’ll explain why you got the sour looks and suggest a different response that aligns nicely with both company and investor interests.
What Do Most Startups Want?
Most startups want to build cool products, sell them to delighted customers, bring a growing number of committed employees along for the journey, and make a chunk of money at some point in the future to help pay for a kid’s college, retirement or both.
What Do Startup Investors Want?
With only their investor hat on, they want a high return on their investment.
When you first answered that you’re not thinking about selling the company or doing anything crazy like an IPO, the investor worries they might never get a return on their investment. In order for them to make money, you usually need to have some exit event like an acquisition or IPO. There are other ways for investors to get a return on their investment but an exit event is the scenario they’re most often thinking about.
When you later answered that you’ve already identified six companies that surely will want to acquire you as soon as you reach $5M in revenue, you’re signaling to the investor that you’ve already spent a decent amount of time thinking about selling the company and, worse yet, you’d be willing to sell the company as soon as you reach $5M in revenue. The return to the investor with such a quick exit won’t likely be that exciting and is that amount of revenue considered a big success in your mind? Hopefully not.
It’s hard enough to plan for and predict your own company’s success. Any exit event is likely years away. So don’t get sucked into the accidental traps that are associated with this question.
An Alternative Response
Question: “One final question, what is your exit strategy?”
Response: “Our top priority is to build a world-class company that is growing and increasingly profitable over time. With that we’ll have infinite options. At some point in time, one of those options might be an acquisition or IPO exit. The market we are in certainly has powerhouse companies that have a track record of acquisitions, but we’re not spending energy now modeling various exit options because refining our plans to double our revenue in the next 12 months is far more important. Essentially, our exit strategy results from building a great company.”
You get the idea. You acknowledge that an exit is inevitable at some point in the future (investor is relieved) but you first want to build a large and great company (investor is excited). It really is true that great companies have infinite options. My friend and former boss at NetQoS, Joel Trammell, use to say this all the time and it’s a principle I’ve adopted and preached ever since. You too should consider periodically preaching this to your management team and the company at large.
I sometimes get asked by startups if their pitch deck should include a slide communicating the Exit Strategy (see related post titled “Pitch Deck Flow“). You can surely tell from this blog post that my typical answer is “no” because it communicates too much emphasis on selling the company. Instead, communicate how you’re going to build a great company and leave it up to the investor to ask the exit strategy question.