Founders often ask me what angels look for when they’re choosing where to invest, and the truth is, not all angels have the same priorities when it comes to investment choices. However, here are some general principles for founders to consider when they’re preparing their pitches.
No matter how early-stage you are, it's important to let your potential investors know that you're thinking intentionally and deliberately about an exit strategy. Communicating clearly that an exit strategy is on your radar can be crucial to demonstrating that you’re responsible and trustworthy. An important component of developing your exit strategy is doing your research so that you can speak knowledgeably about how you create value in your market.
So what are some common mistakes founders make when they outline their exit strategy? How can you be realistic about your exit strategy?
Don’t say you’re going public.
An exit strategy that startups often describe is going public, but the truth is, in today’s ecosystem, going public just isn’t a realistic exit strategy. If you’re pitching and you say that your exit strategy is to do an IPO, you might as well say your exit strategy is winning the lottery. It’s not impossible but it’s very unlikely. When founders do this, especially in the early stages, it’s a red flag to investors.
Be informed about potential acquirers.
Another common exit strategy startups often mention is whole or partial strategic acquisition. In today’s tech ecosystem, strategic acquisition is a much more realistic exit strategy than aiming to go public, but make sure you do your research. It’s disingenuous to promise that your startup is going to conquer the world and be attractive to all potential acquirers. If you’re suggesting that a company will buy you, you need to articulate why they’d want to buy you. What are you doing that’s unique and sustainable, and why would your potential acquirers want it?
More money, more options.
Founders are often so consumed with all the moving parts of running their business that they forget about one simple thing — making money. If your company is doing well and making money, you have so many options. You can sell the company or pay dividends, for example. If your company is struggling to make money it will be much harder to achieve a strategic acquisition at a good valuation, as the potential acquirer has a much stronger negotiating position when they know that you need the money.
So before your next pitch, ask yourself: Can you answer these questions confidently?
- What is my sustainable differentiation?
- What does my company do to create value?
- Who are my competitors?
- How will my work intersect with the strategic trajectory of potential acquirers?
If you can’t answer these questions when you’re talking about exit, your strategy will ring hollow. If you can speak confidently to all these issues, your potential investors will trust that you know what you’re doing — even if you haven’t got all the specifics of your potential exit strategy nailed down.
Photo: Looking for the Exit by Paul Bence is licensed under CC BY-NC 2.0