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The Exit Strategy question always comes into play because it is the ultimate question a venture capitalist or angel investor needs to have answered to determine when and how his or her investment will be recovered. Management teams need to carefully weigh the different exist strategies and be flexible because what may be your exit strategy today can change tomorrow.
There are a few basic exist strategies: (l) the buyout by a competitor, (2) going public or (3) when an investor buyout, a larger venture capital firm buys out angel investors or a small venture capital investor.
The Buyout. If the larger competitors in your industry have been known to acquire some of their smaller competitors this is a viable exit strategy. Have the details ready if an investor asks which competitor is likely to buy your company and be prepared to respond with facts. For instance, which companies did that competitor buyout in the past year. It is a common growth model for companies to grow through acquisitions.
Going Public. If your management team agrees on going public be sure that someone on the management team has some experience with the mechanics of running a public company. A venture capital firm will have a problem with this exit strategy if no one has public company experience. Your management team could of course explain that you will hire a CFO, General Counsel or President that has such experience. This may satisfy them and show them that you are at least planning ahead.
Investor Buyout. Sometimes smaller venture capital firms will invest in companies that the larger venture capital firms won’t touch. If a venture capital firm is managing $1 Billion they aren’t making $5,000,000 investments, otherwise they would have about 200 investments to monitor.
Smaller Venture Capital Firms> or Angel Investors usually fill the void by investing in companies looking to raise $500,000 to $5,000,000. They sometimes do not like companies to go public because of the uncertainty of stock prices and the expense of getting publicly listed. Even worse, if the company does a reverse merger into a public shell it could dilute their equity position. Also the public shell may have skeletons in its closet such as undisclosed debts, potential lawsuits from former employees or undisclosed convertible securities that are outstanding at a below market price.
Conclusion. Make sure your management team carefully evaluates thes Exit Strategies and covers them not only in the Business Plan but is also well-prepared to respond to any questions an interested investor may have on the subject.
There are a few basic exist strategies: (l) the buyout by a competitor, (2) going public or (3) when an investor buyout, a larger venture capital firm buys out angel investors or a small venture capital investor.
The Buyout. If the larger competitors in your industry have been known to acquire some of their smaller competitors this is a viable exit strategy. Have the details ready if an investor asks which competitor is likely to buy your company and be prepared to respond with facts. For instance, which companies did that competitor buyout in the past year. It is a common growth model for companies to grow through acquisitions.
Going Public. If your management team agrees on going public be sure that someone on the management team has some experience with the mechanics of running a public company. A venture capital firm will have a problem with this exit strategy if no one has public company experience. Your management team could of course explain that you will hire a CFO, General Counsel or President that has such experience. This may satisfy them and show them that you are at least planning ahead.
Investor Buyout. Sometimes smaller venture capital firms will invest in companies that the larger venture capital firms won’t touch. If a venture capital firm is managing $1 Billion they aren’t making $5,000,000 investments, otherwise they would have about 200 investments to monitor.
Smaller Venture Capital Firms> or Angel Investors usually fill the void by investing in companies looking to raise $500,000 to $5,000,000. They sometimes do not like companies to go public because of the uncertainty of stock prices and the expense of getting publicly listed. Even worse, if the company does a reverse merger into a public shell it could dilute their equity position. Also the public shell may have skeletons in its closet such as undisclosed debts, potential lawsuits from former employees or undisclosed convertible securities that are outstanding at a below market price.
Conclusion. Make sure your management team carefully evaluates thes Exit Strategies and covers them not only in the Business Plan but is also well-prepared to respond to any questions an interested investor may have on the subject.