Small business

What Every Startup Founder Needs To Know About Exits

Given that big exits and valuations appear to be one of the factors that are really inspiring all the media attention around the startup ecosystem and billions in venture capital investments, it’s a part of starting a company that every entrepreneur needs to understand.

Still, there seems to be a lot of persuasive myths and misconceptions about this eventual milestone among entrepreneurs. Here’s what you need to know…

Myth 1: We’ll Have An IPO In A Few Years

According to TechCrunch, one of the top misconceptions about startups by founders is that they assume they’ll start a company today, and in a few years they’ll just organically wind up going public and get listed on a major stock exchange.

While there may have been a lot of buzz about a few really big IPOs recently, they are far rarer than they used to be. More companies are staying private much longer. TechCrunch says 97% of exits are actually by acquisition, not IPO.

This doesn’t mean you shouldn’t pursue an initial public offering. At least several top CEOs I’ve interviewed on the Dealmakers Podcast were actually in the midst of, or days away from going public when they got acquired. It is still potentially a great outcome. For some startups, it will be the best choice of exit.

Just recognize that it may be less likely than you think, and that should spur founders to be thinking about what the mergers and acquisitions path looks like and means for everything else they are doing, including fundraising.

Myth 2: An Exit Will Probably Come Much Later

While on the one hand, some startups seem to be raising more rounds, the majority of exits may come far sooner than entrepreneurs think.

Series D fundraising rounds seem to be much more popular these days. Even Series E rounds. They seem to become faster and closer together too.

However, data from CB Insights shows that most startup exits actually come right after Seed and Angel funding rounds. 44% happen between the Seed round and before the Series B. Almost 60% of exits from before a Series C is raised.

I know many founders who have received acquisition offers far before they thought they would be ready. That makes it extremely important to know how to react and to talk to your M&A advisor about it in advance.

Myth 3: Companies Are Bought, Not Sold

The common saying is that “companies are bought, not sold.” That’s not technically true, nor perhaps the best mindset for entrepreneurs.

It is true that you aren’t going to put a for sale sign on your business or list it on Craigslist. Inbound offers do seem to be common. The best way to attract offers is to focus on building a wildly successful business.

Yet, there is a whole lot that is done by founders and teams over a period of months and years to both positions their companies to attract offers and maximize the selling price of their companies.

The best exits are the result of a very intentional and strategic plan that starts far before you actually want to sell or go public.

Myth 4: Selling Your Company Is Simple

We all know that there is obviously a lot of SEC paperwork involved in filing for an initial public offering. Though, the media coverage of selling a company seems to be about as brief as “A company bought B startup for X, and the founders are now billionaires.”

Selling a company is nowhere near as simple as selling a car, SaaS product or even a house. Some giant corporations have great, well-coded machines for making acquisitions. Like Google. Most buyers aren’t nearly that experienced.

There are many different terms to agree on. There are often large teams involved on both sides of the table. Even getting to the point where you agree there is a deal to be made between your companies is often the result of months or years of meetings and relationship building.

Then the selling process itself typically means night after night of phone calls with lawyers, flying to meetings, and all the fun of due diligence. You don’t know the meaning of stress until you you’ve been through this type of due diligence.

The outcome can be life-changing for you, your team, family and early investors, and a challenge for taking on, but it is not simple.

Myth 5: The Exit Is The End

More often than not, an exit is not the end of your involvement with your company. That can be a good and bad thing.

The concept of just creating a hot startup overnight, and selling it to someone for a billion dollars and heading off into the sunset to spend it, isn’t really a reality. In most cases today, shareholders and acquirers will want the founders to stay on.

Often for a number of years. They don’t want others to panic if you sell your shares. They want a smooth transition and integration, and someone who is already good at managing the company to keep doing it well.

Some founders love this experience of staying on during an earnout period. Especially, if they are working and learning at a company like Google. Others find it very, very difficult to stomach watching their business baby being driven into the ground every day and the fact they don’t really have the power to make decisions anymore.

Some entrepreneurs even end up buying their companies or some assets and business units back later on, after they start failing.

Myth 6: I Can Just Think About The Exit Later

For one reason or another most entrepreneurs just push off thinking about the exit until it comes up.

That’s like trying to figure out you are going to make payroll and get the hands-on formula for your baby when they are starving today and employees are knocking on your door asking for paychecks

Yes, you’ve got your hands full. You may not have an exit for several years. Though you really don’t know what life is going to bring you or throw at you in the morning. It could be a financial crisis. Or it could be a nine-figure offer for your startup.

The exit should always be on the CEO’s mind. If you ever take money from investors, then you are working toward an exit.

That means weekly actions that will prepare you for and set you up for the best possible exit. If you aren’t doing that you are leaving a lot of money on the table. You are selling everyone short, including the mission.

Learn as much about M&A as you can all throughout your journey so that you are ready and have poised your startup for the best potential exit.

Myth 7: Then I’ll Retire

Many entrepreneurs have tried to retire. They travel, maybe buy a little vacation property, spend lots of time with family, and go hang out with other entrepreneurs. Then they either can’t sit still any longer or their spouses and kids tell them to get back to work and go do what they love most.

Enjoy those moments after your exit. Use your gains to enjoy more of those experiences all the time. Then get to work on your next startup or become an angel and invest in others.

If you have any questions, please ask below!