Venture capitalists care a lot about the exit because they have investors as well, but they might not always care which way it occurs. Typically, exits can occur in two ways: mergers and acquisitions or IPOs (Initial Public Offerings). As an entrepreneur, make sure you have an idea of how you’d like to see an exit take place.
Venture capitalists care a lot about the exit because they have investors as well. In fact, their investors typically expect to see money back in six, eight, or ten years. The day they make that investment, they're always thinking about when can the exit occur.
Typically, exits occur in two forms. First, in a sale, often called a merger and acquisition; or second, an IPO, you take the company public. In the case of an M&A, some company buys your startup, pays a certain amount of capital, and all the stock is dissipated. In the second situation, the company is taken public, and the stock is freely tradable at hopefully a very high price.
The venture capitalist typically doesn't care how the exit occurs. They just care that it's big. For the entrepreneur, the exit form really matters because a buyer doesn't want to just buy the company and disburse with the people. Typically, the buyer wants to buy you, and they want to employ you and your team for many years to come. So in the case of an M&A situation, as the entrepreneur, you want to make sure that you really want to work for the new buyer because now you have a new boss, and the new boss has a certain mission that they have, and a certain culture, and a certain set of objectives. So you want to make sure there's good alignment, and you want to make sure you would be happy in that environment, and that your team would be happy in that environment.
The second piece of advice I give people is get to know the potential acquirers before it's time. Strike partnerships with them, find opportunities to work with them on joint customers. It's a great way of testing cultural fit, and a great way of testing out whether they will be a strategic fit as well.
You also want to be careful to negotiate clearly how long you have to stick around. Some entrepreneurs want to sell their company and leave as quickly as they can. Others want to stick around for many years to come to see their vision come through. So you really have to decide what's the best fit for you, and to match that with the acquirer.
The best time to exit your company may be when you don't need to. Try to control your own destiny. Have the financing on hand, have a strong balance sheet. Don't be in a situation where you're desperate.
Bussgang, Jeffrey. 2010. Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Own Terms. New York: Penguin Group. Chapter 6 “Jackpot: Routes to Cashing Out”.
Mark Suster. “Some Quick Thoughts on Exits for Technology Startups.” Both Sides of the Table. Blog Post. Nov 9 2012.
Fred Wilson. “Who Decides When to Exit.” AVC.com. Blog post. Sept 18 2009.
Questions for You
How do I want an exit to occur in my company?
Do I want to be acquired? If so, which companies would be good cultural and strategic fits?
If acquired, how long would I like to stick around in the company?
How can I prepare for an exit without needing one?
Questions for Your Team
How do our founders think about exiting the company? What would this mean for me and my job or role?