Exit Strategies for Startup Stakeholders

Everybody mostly talks about the initial stages of venture building.?

But what happens when your creation actually takes off? And, it’s ready to reap the rewards of your hard work??

Here, we’re talking about Exit Strategies.

Before we delve into the exciting world of Exits & various strategies, let's check some quick facts:

• Only a tiny fraction of startups (around 0.1%) reach an IPO.
• Mergers and acquisitions are the most common exit strategy, accounting for roughly 70% of all exits.
• The average acquisition price for a startup is around $20 million.

While the journey toward an Exit might be thrilling, it's crucial to have a well-defined strategy in place to maximize your startup’s success.?

Today, Favcy VB explores the different Exit Strategies available for a startup! Hop in!

Exit strategies for startup stakeholders

For stakeholders in the fast-paced world of startups, the ultimate goal is often achieving liquidity – transforming their ownership stake into cash or readily tradable assets.?

This is where a well-defined exit strategy comes into play. It serves as a roadmap, guiding founders, investors, and other stakeholders toward a successful transition, ensuring everyone involved reaches their desired destination.

Understanding Exits

An exit strategy goes beyond simply exiting a company. It encompasses a comprehensive plan outlining the method of achieving liquidity, the timeline for achieving it, and the value shareholders aim to extract from their investment.?

This plan safeguards the value of the business during the transition, fosters a smooth handover for management and employees, and provides founders with a potential source of income if they choose to remain involved.

Crafting the perfect Exit

Developing an exit strategy is not a one-size-fits-all approach. Each company's unique characteristics and goals necessitate a tailored plan. The specifics of the strategy can be influenced by various factors, such as:

• The chosen exit path: Different exit options, like mergers, acquisitions, private sales, or initial public offerings (IPOs), necessitate distinct considerations and negotiations.
• The acquiring entity's needs: When an acquisition is the chosen path, the needs and goals of the acquiring company significantly impact the structure of the deal.
• The existing company's needs: The company's financial health, future vision, and the founders' aspirations all play a crucial role in shaping the exit strategy.
• Investor goals: Various stakeholders' investment horizon, risk tolerance, and desired return on investment influence the exit strategy.
• Number of stakeholders: The presence of multiple stakeholders with diverse interests necessitates careful alignment and consensus building to ensure a smooth exit.

It is crucial to remember that while individual stakeholders may choose to exit at different points, the company should strive towards a common goal, be it an IPO or an acquisition, to ensure a successful outcome for all.

Exploring the Exit landscape & options

The startup ecosystem offers a diverse range of exit strategies, each catering to specific scenarios and objectives. Here's a closer look at some of the most common Exit options:?

• Merger?

Two companies combine forces to form a new entity, with stakeholders from both sides holding ownership in the newly formed enterprise. While this approach fosters a sense of continuity, it essentially marks the end of the two individual companies that merged.

Mergers can be advantageous when two companies have complementary strengths and can achieve synergies by combining operations.

Example: Flipkart merged with Myntra in 2014.

• Acquisition

A larger corporation absorbs a smaller company, taking full ownership of its assets and liabilities. The acquiring company compensates the founders and investors of the acquired company with a combination of cash, stock, or a combination of both.?

Acquisitions can provide founders with immediate liquidity and open doors to new opportunities within the acquiring company.

Example: PhonePe was acquired by Flipkart (later acquired by Walmart) in 2016 for $14 billion.

• Private Sale

In a private sale, the company's ownership is transferred to a single entity, often a private individual or another company. This option is frequently chosen by retiring founders or those seeking to hand over the reins to a trusted individual or entity. The sale can be structured in various ways, including owner financing, where the seller agrees to spread out the payment over time.

Private sales can be faster and less complex than other exit options, especially for startups in niche markets.

Example: OLA, the ride-hailing giant, acquired Foodpanda India in a private sale deal in 2017.

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• Initial Public Offering (IPO)?

Taking a company public through an IPO allows it to raise capital by selling shares to the general public on a stock exchange.?

This is a complex and rigorous process, but a successful IPO can provide founders and investors with significant liquidity and potentially propel the company to new heights. However, only a select few companies meet the stringent requirements and navigate the complexities of going public.

IPOs offer a way to raise significant capital and increase brand awareness.

Example: Zomato, the online food delivery platform, had a successful IPO in 2021, raising over $1 billion.

• Liquidation?

In this scenario, the company ceases operations, sells off its assets, and uses the proceeds to settle outstanding debts. Any remaining capital is then distributed among shareholders based on their ownership stake. While not an ideal outcome, liquidation can be a necessary step if the company becomes insolvent or if continuing operations become unsustainable.

Liquidation can be a last resort when a startup is unable to sustain its operations.

Example: Fashion marketplace Jabong shut down its operations in 2017 after facing financial difficulties.

Conclusion

Developing and refining an exit strategy is an ongoing process that requires continuous evaluation and adaptation.?

Remember, a well-defined exit strategy is not just about reaching the finish line – it's about charting a course that maximizes value for all stakeholders and paves the way for a sustainable future.