How to communicate your exit strategy with investors

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It can seem a little bit premature, to say the least, but the route to an exit is always in the back of an investor’s mind, whether they ask you about it or not. So, how do you prepare in case that question does indeed pop up?

How do investors think about an exit?

Firstly, we need to try and get into an investor’s mindset. The perfect example to share is Peter Cowley; a serial angel investor, a friend of Raising Partners, and the former UKBAA Angel Investor of the Year. Peter is incredibly open and transparent on his website about his track record of investing in early-stage technology companies. We’ve shared below a summary of his investments, which you can check out in more detail on his website:

Results to Spring 2022:

76 investments in 10 years
11 exited with positive return of invested cash (7 trade sales, 2 Private equity and 2 IPO)
2 exited with negative return of invested cash (2 trade sales)
17 failed with no shareholder returns
46 live investments (some thriving, some dormant)

The reason we are sharing this track record is because it demonstrates the portfolio approach that investors take when they’re investing in early-stage companies. By diversifying their portfolio and investing in a wider range of companies, investors not only spread their risk but also increase their chances of finding the small handful of companies that will provide them with outsized returns. Spoiler alert…most startups fail! So, investors look to effectively spread their bets and hopefully find the ~10% of companies that really will give them significant returns.

With that in mind, when an investor is considering investing in your company, they need to be convinced that yours sits in that ~10% bracket that could provide them with those outsized returns. Anecdotally, a number of our angel investors that invest at seed stage are looking for companies that they believe could provide a 10x return or higher on their investment. It’s also worth noting that this portfolio principle is generally as true for angel investors who invest at an earlier stage as it is for venture capital firms who may invest at a later stage.

How to approach discussing an exit with an investor

In most scenarios, an exit is an outcome, not a defined strategy. An acquisition or an IPO often comes about due to good fortune and good timing, as opposed to meticulous advanced planning by the founding team.

As such, there’s not much point in outlining a super specific route to where you believe an exit will come from. Rather than suggesting that you have a definitive plan to be acquired by a certain type of company at a certain date, it’s better to focus on a high-level goal that you want to achieve and the exit opportunities that may come as a result of achieving that goal. It may be a certain slice of market share, a certain revenue level or just another chosen KPI that’s most relevant to your company in your industry. For example, you might choose to focus the conversation around growing your paid subscription user base to 1m members, how you intend to achieve that, and to outline why prospective acquirers might take a closer look at the business when you reach that point. If you take that approach, you can demonstrate the scale of the business that you want to achieve and reference a likely exit route without being too prescriptive about something that you ultimately cannot control.

In addition, it’s always good practice to demonstrate your knowledge of M&A activity in your industry. We often advise our founders to include examples of high-profile exits in recent years in an investor deck, purely to show just how active some potential acquirers are and what kinds of businesses (with what characteristics) have proven to be acquirable/exitable ventures. Again, this is more of a subtle reference to where an exit route might come from without pinpointing any one likely route. It’s all about getting the investors’ cogs turning about how big this opportunity could become and therefore, hopefully influencing their decision that yours could be the 10x returner that they’re looking for.

And lastly, whilst it’s important not to be too prescriptive about an exit, remember that the equity an investor holds in your company effectively has zero value until it can be sold. Be aware of what possible exit routes there are and don’t shy away from them if the conversation leads that way e.g. IPO, trade sale, share buyback, etc. There are some supposed “experts/advisors” on LinkedIn/Twitter who like to make bold statements that if you’re talking about an exit when you’re still an early-stage founder, then you’re not focused on growing the business and are therefore uninvestable. Do not pay any attention to this kind of rhetoric.

Most experienced, savvy investors are subconsciously thinking about an exit as soon as they open up your investor deck, and believe it or not, you can be fully focused on growing your company and be thinking about where an exit might come from at the same time. It’s just that their idea of the size of the return of their investment is driven more by your team, your ambitions, the size of the market, and the quality of your product than it is by a detailed, exact plan that outlines when and where an exit will come from.