If you keep up with the startup blogs, you’ll eventually start to see some seemingly conflicting advice from VCs regarding exit strategies. This advice generally falls into one of two categories:
- Don’t spend too much time on your exit strategy right now. You should be focused on your product development, your go-to-market strategy, etc. You can’t predict the future, so you’d only be guessing anyway. Besides, you should be in business because you’re passionate about it, not because you’re looking for the pot of gold at the end of the rainbow.
- It’s never too soon to be thinking about your exit strategy! Investors only invest in your company because they believe that someday you’ll either go public or be acquired in an exit that will prove to be advantageous for all parties involved. If you’re not thinking about that right now, you’re doing yourself and your investors a huge disservice.
Not understanding your exit options is rather short-sighted – but so is making overly optimistic assumptions about how things will unfold. We’ve seen too many promising startups jeopardize their future by putting all their eggs in one basket.
Our advice to startups? Identify your top exit scenarios, and let those long-term plans inform the decisions you make in the short term. You’ll find yourself marching steadily toward the position you want to be in.
That said, it’s important not to let your plans for a glorious exit distract you from your day-to-day responsibilities, which include ensuring you have the funds necessary to stay afloat until that magical day comes. Some founders bank so heavily on an impending acquisition that they stop raising money altogether. They think they have enough to see them through, but when the well dries up, they instantly become prime targets for a lowball offer. This approach also puts the company in a highly vulnerable position should the acquisition fall through.
Having money in the bank during any M&A negotiations will only serve to make you more attractive. These reserves will also help ensure that you get what your company is worth. If you’re running short on cash, you may be tempted to hurry the acquisition process along. But acquisitions take time to negotiate – it can take six months at a minimum. Spend any less time than that, and the outcome may not be as favorable for you. In general, the more runway you have, the more room you have to negotiate, which can translate to a higher valuation.
Sometimes things don’t work out the way you planned – or in the timeframe that you planned them. Don’t conveniently time your next round of financing for the month that you’re going to run out of money. Keep the runway open so you can keep going no matter what happens.
Whether you’re targeting an IPO or hoping to be acquired, it’s important to keep a watchful eye on your cash balance. When you have only single-digit months of runway left, it’s time to take action. Raising money takes time too, but with money comes leverage for you and your company.