Asking a business team to consider an “exit strategy” before they’ve proven that their business idea works can lead to wishful thinking, with less foundation than the high growth sales forecast that precedes it. Here are six reasons why many companies and investors are wary of “exit expectations”; high growth start-ups take note – forewarned is forearmed:
- Whose exit? Plans often confuse who is going to exit: the founder, the board, the executive management team and/or the investor. Each possibility has different implications, motivations and risks that need to be thought through. Can you guarantee these will not change in the eight years (the average exit time) before exit?
- Less Investment Choice. Only a small number of companies offer sufficiently rapid growth to enable an exit position capable of meeting investor Return on Investment (RoI) objectives. Even fewer achieve it. Meanwhile other businesses that are capable of making a good return for investors and are ignored because the classic “exit” is not achievable.
- No exit – no return. It is difficult to sell companies in the current environment and even more difficult to complete an Initial Public Offering (IPO). It is unlikely that this position is likely to change over the next five to ten years. Without an exit, there’s no return of capital to the investors.
- Poor focus. Management teams that are focused on an “exit event” can fail to focus on providing value to the potential purchaser of the business. They grow the business and hope to abandon it to someone else for a large sum of money.
- Reallocation of funds. The company’s resources are typically used to pay those who are leaving the company rather than used to invest in its future. On exit the company loses money as well as key personnel. This loss reduces the chances of the company’s ongoing success (which is the key to the purchaser of that company) and therefore its value.
- Burn and die! Designing a company for fast growth generally leads to a fast cash burn rate. If the original plan for the company had any errors or miscalculations, there is a limited time for adjustment or re-focusing of the plans before the funds run out.
So what should investors be looking for? How are investors going to get their money back?