What Could be the Ideal Time for Your Exit?
Walking into the shoes of an entrepreneur; undoubtedly, the ‘E-word’ must have struck you quite often.
Let’s explore what an exit means to a start up...
Exit strategies in startup funding are quite often misunderstood. Startups in search of angel investors or venture capital (VC), very much need an exit strategy, as investors would require it. Startups who are bootstrapped, or don’t have any plans of raising funds, probably would need an exit strategy eventually.
A healthy exit in startup normally follows two patterns:
- Either the startup gets acquired by a bigger company (making ROI sense for seed or early investors)
- The startup has grown enough by itself to eventually register for selling shares of stock to the public
Both scenarios involve scale or higher investment opportunity.
UNDERSTANDING THE INDIAN LANDSCAPE
During the last three to four years, the Indian startup ecosystem has witnessed quite a number of exits, most of them were unexpected. Take the recent example of the Walmart acquisition of Flipkart for an amount of $16 billion. Now, was that because the promoter and investors of Flipkart, wanted to pocket a good amount of money? Would Flipkart survive the onslaught of Amazon, without Walmart as a partner?
101 Exits so Far!
The Indian startup ecosystem has secured a whopping $1.8 billion in funding in the first 40 days of this year. This amount has been raised over 100 deals. At the same time, there were 101 startup exits in 2017. These exits led to some consolidation in various sectors; with ‘PropTiger’ acquiring ‘Housing.com’, Berlin-based ‘Delivery Hero’ taking over ‘Foodpanda’, ‘BookMyShow’ acquiring ‘Burrp’, and the recent one being ‘Trucaller’ acquiring ‘Chillr’.
IPO Scenario in Indian Startups
The Initial Public Offering (IPO) route has not been too successful in India. 2017 didn’t witness any startup lining up for IPO, where 2016 only saw ‘Yatra’, ‘7Seas Entertainment’, ‘Koovs’ and ‘Intellect Design Area’.
This number is pretty low as compared to the US, where 19 companies took the exit route in 2016.
Bharati Jacob, Founding Partner, Seedfund, rightly sums it up, “If you look at the venture capital market in India it has been present for close to 10 years but comparing that to an ecosystem that is six decades older doesn’t make sense. India needs to be compared according to the dynamics of an India market.” Bharati made this statement comparing India to US, China and Israel.
A Deeper Analysis of Exit Strategy can only be understood by defining key crossroads every start up finds itself in. This is best explained by looking from both the entrepreneur and the investor’s perspective, most common reasons for exit are mentioned below:
From the entrepreneur’s POV:
A) Internal conflict:
Internal factors like change in goals of the entrepreneur like migration plans or other personal reason, lack of sufficient funds to sustain, CO-founder conflict could justify reasons to exit from the brand founded.
B) External conflict:
Mostly happens due to various Mergers and Acquisitions (M&A) where suddenly the founder is not able to keep ‘his or her way’ getting things done going.
Change in government or legal policies could also mean exit for the entrepreneur status.
From the investor’s POV:
A) Saturation point
Many investors exit at this stage because it means the idea is at an optimal stage to garner a new investor (probably a bigger kitty), or maybe the investor needs to re-do the business model.
B) Compete Brand
Most investors invest in verticals where they are comfortable. That means they might hold similar vertical specific investments that may start to compete. This creates a clash of interest and many exits have happened at this juncture. Especially on brands where investors are also part of board.
How important is it to have an exit strategy?
An exit strategy shows a sound plan to make sense of investment made. This will help an entrepreneur and an investor to develop a stop-loss mentality right at business plan stage.
In an ideal world, “exit with profits” must be the end-goal for both entrepreneur & investor. Logically thinking, an average start up exit is 7-8 years and looks like an opportune time, post building a brand image, new customers aquisition gaining traction and sales numbers justifying profitable exit.
The exit scenarios vary and depend on individual situation, but “good business” is always a PLANNED EXIT.