The second key question every investor is guaranteed to ask. Do you know what it is?

Following on from my article yesterday about "The one key question every investor is guaranteed to ask. How will you answer it?", there is almost always a followup question in an investor question set.

As in yesterday's article, the question you might face in a pitch or investor conversation aren't always direct; sometimes they are "purloined", or wrapped into a broader series of questions.

And as I highlighted yesterday,

"Investors don’t invest their money in 'ideas', or in people to invest in testing ideas. They typically either made it themselves, and therefore don’t want to lose it, or invested their credibility & reputation in securing other peoples' money to invest, and therefore….don't want to lose it. Starting to see a pattern?"

The second (almost guaranteed) question that you'll here "Where's my exit?", or "how do I get my capital back?". 

But before I address it, there a couple of pressing issues that you, as a founder need to understand.

You might've recognised (or perhaps you haven't yet), that investors have to work pretty hard to accrue their wealth, and aren't keen to lose it. Whilst it might seem that investors abound, what you will soon discover in conversation with them, is that there are a great many more places that they could put their money (and time), such as property shares, fixed interest etc., and a great many more ventures to invest in, than they have the capacity or appetite to support. For every one of you, there are a thousand other 'yous' lined up behind you, clamouring for time money & expertise.

The other thing that’s important, is that unlike you, who has time aplenty up your sleeve, and on your side, an investor may not. In accruing their 'stake' (the amount of money set aside for their investment portfolio), they have likely spent more than a decade or two to do so. For them, time is now likely their enemy, and they don’t have the luxury of spending another decade or two to re-acquire a stake to recommence investing (assuming that they want to roll the dice) again.

So losing their stake to every wannabe, "me-too" copycat or hair-brained idea is not even an option.

Though it's not all bad news. There is something on your side that other asset classes can't offer. Almost every venture investor I know, wants to work with inspired founders, in the pursuit of a "grand mission". They genuinely want to leverage their networks, knowledge, skills & capital in spaces that inspire them. In some respects it's a form of "amplified philanthropy".

Which means that you can incorporate that into your strategy, especially where the "exit" question is concerned.

So back to the exit.

Like most pitch decks I've read, the 'exit' (if there is one mentioned), typically either completely ignores the exit question -(which is sure sign that you are a "startup amateur" and likely to walk away with your tail between your legs- or that you've pitched the typical "billion dollar unicorn with an IPO on the New York Stock exchange - often in just 4 years' time.

Let's break a couple of these myths down, and then I'll give you a better framework

• Fact one. Less than .13% of funded startups ever go on to IPO
• Fact two, there are more recognised astronauts (336) than there are 'unicorns'. Which means you’ve got more chance of going to space than building a unicorn.
• Fact three: more than 50% of the so-called unicorns are in fact not worth the money that they are claimed worth (do a quick search on 'Theranos') , and are built on foundations of sand (often debt & hype).
• Fact four: Less than half of all CEO's remain in a venture once it receives significant funding (eg .$10m), with the majority being replaced by later stage venture investors, with "their own man".
• Fact five: the quantum of equity share of a founder suite is about the same at exit, irrespective of whether that exit is as a $50m gazelle, or $1B unicorn.
• Fact six: 8 to ten times as many ventures are acquired by other ventures though Merger & acquisition opportunities, than reach IPO status.
• Fact seven: the average time that a billion dollar company now takes to IPO is now down to twelve to thirteen years.

Of course you'll be able to find individual cases in popular press that are the exception to the rule, which prove an argument to the contrary. I simply argue that the poplar presses are designed to gain advertisers though increasing distribution, so are seeking to publish stories about outliers, simply because they are the exceptions, which is exactly why you read about them.</soapbox>

So what should your exit strategy be?

I would argue that you can't possibly yet know, simply because most ventures succeed with a fundamentally different idea than the one that they started with.

However, as I often say "start with the end in mind and reverse engineer back". Which simply means, "here's where we are trying to get to, and here's the milestones that we think we are going to have to pass through in order to achieve it". With one addendum (I'll get to that in second).

And this is where the opportunity to get just a little clever really kicks in. Remember earlier where I mentioned "amplified philanthropy"? How can you possibly really understand what the journey will actually look like if you've never been there? It's be like describing snow to someone who's never lived outside the tropics. Try as you might, language, words and even images, are a very poor descriptor.

Experience matters - or rather, it’s the only thing that matters here.

Here's what inspires me when I occasionally (actually, rarely) see it in a pitch deck.

"we think our exit is X, at about Y time frame, but we need the guidance of great mentors to come with us on the journey to help discover the real answers".

Now that would get my attention. It shows that you:

• Are passionate and committed
• Have a good plan, the outcomes of which will change over time
• May not yet have all the answers
• Are teachable and willing to learn
• Recognise the value of those who have walked the path before
• Value the advice of mentors
• Understand that it's going to take time, and
• That you can't do it alone.

So think about your journey for a minute.

• Are you in a sprint, or a marathon?
• Do you yet know all of the skills resources and knowledge you'll need to succeed?
• Do you know where all of that’s going to come from?
• Once you’ve presented the best case for joining you, who's decision is it?
• And is it up to you if/ whether, and when some-one invests?

Bringing on investors is like any relationship. And exiting is as painful as divorce (I know, I've had a couple of those). They never end well, usually in tears, and hard to even be in the same room together again, let alone hold a future conversation together. So don’t set yourself up for that.

Demonstrate a willingness to learn & discover, and then invite others to join you on the voyage of discovery as you set off for the "brave new world". If you are open, they might just need to see a little proof that you are making progress, before they jump on board.

And if you do 'less selling' and 'more telling (stories)', not only is it more likely that those investors will join you at some point in the journey, but will also likely invite some of their friends (other investors) along on the voyage too.

"To Your Success", Daniel

PS. This is the 3rd of 60 articles in 60 days. If you aren't following, commenting, sharing, subscribing, liking (or hating) any of my other articles, then what on God's earth are you doing reading this post? ;-)

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About Daniel

I'm a founder, mentor, advisor, investor, venture catalyst, accelerator, and venture capitalist. Also traveling under the alias of 'That Startup Guy', I am a co-founder of StartUp Foundation (The Startup Accelerator for Experienced Professionals) and am intensely, deeply, passionately dedicated to "The intersection between personal mastery & business entrepreneurship".

My goal is to help you, by guiding you through the steps, and past the challenges and pitfalls, to turn that 'Great Idea' into reality, whether it's a business, service, product, or to disrupt an entire market.

And if you've got an experience about startup success (or failure), comment about it. If you've got a question, reach out to me via your preferred social media. Other posts can be found here on Linkedin.