funding, venture-capital, angel-investors, exitWe are currently looking into angel funding (we are just out of beta with a clear version 1, and we have enough clients already to pay for about half of our expenses – my understanding is that we are not yet ready for full VCs), and we are being asked for “A clear, plausible exit strategy within 5-7 years”.
We are an educational technology product. Our goal is to create a company, grow it, and stay with it for the long term. How do we approach a question like the one posed? Does this mean that we are simply not what they are looking for?
Thanks in advance for any advice and wisdom!
Edit: I didn’t accept an answer because none were complete (in my view), but these two answers taken together helped me piece it together:
https://startups.stackexchange.com/a/4003/3485
https://startups.stackexchange.com/a/3986/3485
Thanks to all of the responders!!!
There are broadly two types of investor: long-term and short-term. VCs are short-term investors, and the nature of the transaction is clear. We provide you with cash to help you grow in value, you commit to providing the way for us to realise that value - that is, an exit.
Far the most common exit is a trade sale - the business is sold to a significantly larger enterprise. And the best value is achieved by providing the buyer with control. So except in very exceptional cases, deciding to take venture money is deciding to allow the likelihood that in a few years you will not have a controlling stake in, and may not have the option to continue working in, the business.
If you can’t stomach this possibility, VC isn’t for you. The venture funding industry is large, but there are other sources of funding - whether of “patient capital,” or of funding that’s non-equity or part-equity. Or innovate your business model so that your customers fund your business
Before you decide, go and read a bunch of founder stories. A high proportion of founders have faced the same dilemma, and have come out the other side. Your passion and vision for the business long-term is of great value to your team, your customers and your investors. When a VC tells you there has to be an exit plan, it’s not because the VC doesn’t believe in you, and it’s not because VCs are evil, it’s because that’s how venture funds are raised in the first place, and it’s what the investors expect and require.
How do we approach a question like the one posed?
Like a salesman. Your Angel investor is basically asking you: “How do I make a quick buck from you?” And your answer should be: “Here’s how” with a credible plan laid out before him.
That can mean anything from “we plan to run a small business where you get dividends” to “we plan to do an IPO” or “we plan to ping the likes of X or Y a few years down the road and see if they’re interested in buying us”.
Chew on that last one in particular because it’s actually the most common for startups that scale enough to not walk the path of throwing dividends at investors (VCs hate that, Angels less so) but not enough to do an IPO. Who would potentially be interested in buying you once you’ve a proven concept? And what arguments would you put forward (synergies, etc.) to make it happen?
Does this mean that we are simply not what they are looking for?
It can and it doesn’t matter. Be wary that not all investors invest for the same reason, and it’s not a good idea to try to make them all happy. Come up with an exit strategy and stick to it.
If your potential investors like it they’ll move forward with it; if they don’t they won’t and it’s no big deal – there’s more money out there, and it’s better to have strong interest from a select few investors than vague interest from many who make you come and go forever in endless rounds of “maybe we’ll invest if you find somebody else”.
The “exit strategy” question is understandable from the Angel/VC viewpoint. They see the investment as a black box and want to evaluate input and output.
From the entrepreneur standpoint, I think it is an opportunity to think about the business, and get extra clues for the future. This “meta-reasoning” can help with better understanding what the company is, should do, and how. Sometimes, the first idea just does not stick in the market, and the company must either die or pivot, as by free market rules. Death, then rebirth, can be the right thing to do, but rebirth assumes a transition—a more positive outlook on an “exit strategy follow-up”. And I believe it is worth for both the entrepreneur and the investors to reflect on that. But not too much! Just enough to be prepared.
Beyond that, I point to Denis de Bernardy’s answer on the impossible scenario to making everyone happy. An “exit strategy” must first be acceptable by the entrepreneur. All others are secondary and should either follow or walk away.
Are you not what they are looking for? Well, yes for some, no for others. The goal is to find the ones you want to partner with on a mutual agreement.
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