Crafting a business that stands up to Venture Capitalist scrutiny is not easy. Not only do you need a stellar idea, thorough financials and to be going after a market with huge potential but you also need to have an exit strategy.
Venture Capitalists and Angel Investors are not just going to hand over hundreds of thousands of dollars to you without expecting something in return. At minimum Venture Capitalists expect a return on their investment and they usually expect that return within 3-7 years depending on your market and the predictions you made in your business plan.
At some point in your business plan you have to outline how you will pay your investors back. Here are a couple of the most widely used exit strategies.
IPO or Initial Public Offering – This occurs when a privately held company offers common stock for the first time. A company is given a valuation and can sell shares of their company to the public according to that valuation. This is often used to generate a return for early investors or to generate large sums of cash for expansion.
Acquisition – If you have created a product or service that is truly unique, thriving and attractive to larger companies you may have the option to become acquired by another company. A large upfront sum if often paid out and the management team often stays on board with the new company to continue to provide guidance over the former company.
Liquidation – A very small amount of start-ups end up reaching the entrepreneurs dream. In this case liquidation is often a likely option. At some point, if you business is struggling it is the right idea to shut the doors instead of going after more funding.
Sell The Company – Instead of a company being acquired by another and the management team still being involved another option for exit is selling the company to another owner. It is possible someone is interested in that field of work but does not want to lay down the ground work which you have already done. Thus a deal like this works for both of you.
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