3 Things You Need to Know About Start-Up Exits

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There is an adage that says failing to plan is planning to fail. This applies well to start-up entrepreneurs who must think ahead in scaling a business, making sure that every step leads to growth and profitability.

Even in the early stages of laying the groundwork, start-up entrepreneurs must practice foresight to be able to map out the venture’s growth trajectory. But long-term planning involves so much more than the launching period. Because when it all comes down to it, in the world of startups, exiting with a bang matters as much as making a grand entrance in the market.

While the term “exit” seems to have a negative connotation for new entrepreneurs, industry experts beg to differ. The term “exiting”, in the start-up business parlance, simply means selling the company through an acquisition or by its shares through an initial public offering (IPO). This can be done fully or partially, depending on the agreement between the parties.

An acquisition is when a big company decides to buy out a start-up. This is what happened to Chikka Philippines, Inc., a popular instant messaging application that was founded in 2000 by Dennis Mendiola, Chito Bustamante, and Alexandra Roxas.  After years of successful operations in the country and overseas, it recently announced that it was shutting down after being acquired by telecommunications behemoth Smart.

Meanwhile, Xurpas Inc. is a great example of a start-up with a successful IPO story. When it debuted in the Philippine Stock Exchange in 2012, its share prices hit the roof, raising billions in a short amount of time. The founders, Nix Nolledo, Raymond Racaza, and  Fernando Garcia, said that they will use the funds for regional expansion.

But it must be remembered all the companies above were able to exit because they were able to nail down the business growing initiatives first. Having a strong foundation is crucial most especially in businesses. Setting things into perspective is Artie Lopez, co-founder of Brainsparks (www.brainsparks.ph), one of the leading start-up incubators in the country.

The start-up coach said that new entrants must pay particular attention to putting up the company and growing it.

“The exit should always be considered but the focus must be on growing the company. Because just like any business, start-ups have life cycles too. There is a choice to run the company forever, or to exit,” he shared.

In the world of business, movements can be daunting. But with the right insights coupled with sharp business acumen, changes can be seen as scaling opportunities. As a start-up founder and entrepreneur, these are the things you might want to know about start-up exits, and why you should  consider creating a strategized exit plan along with your business plan structure:

1. An exit creates wealth.

While many start-ups are sometimes started out as passion projects, a start-up company is still a business entity that needs funding and revenue-generating strategies. It is important to note that start-ups mostly use investors’ money and usually go through different levels of funding for growth.

But at the end of the day, founders must be mindful that they must be able to monetize their ideas and solutions so that they can show a return on investments.

Brainsparks’ Artie Lopez shared some of ROI strategies within his industry. “For tech start-up founders and investors, wealth is created during a liquidity event. This is where share prices increase in value exponentially.”

A liquidity event is defined as the “merger, purchase, or sale of a corporation”. It means monetizing the ownership equity owned by the company’s founders and investors.

Revenue-generating strategies can be conceptualized and executed along the way, but the importance of a well-planned exit strategy to generate wealth should not be overlooked.

Gabriel Esguerra, a start-up founder and owner of curated male-oriented watch stores called R.M. Gallagher (www.rmgallagher.co) and Gentleman Project (www.thegentlemanproject.com), said that one of the benefits of an exit is the money that will come from it.

“The positive result of an exit is the payout you’ll get from it. But it depends how successful your business is,” he said.

With this in mind, founders must be able to show they can add value to the company so that it will have a successful exit after a few years. Esguerra explained that this is one of the things that investors consider before putting in the money.

“An investor will more likely be willing to give you his or her money if you have a clear exit strategy, so a start-up founder who is open to an exit is crucial for anyone who’s willing to invest,” Esguerra said.

2. An exit means you can pursue other dreams.

Artie Lopez said that one of the perks of exiting is having more time and funds to explore other types of endeavors. Since an acquired start-up is already running like a well-oiled machine, start-up founders just usually provide strategic management after the buyout.

It is not hidden that establishing a start-up takes so much time and effort. The constant pressures of operations and income generation can take a toll on even the toughest of entrepreneurs. And by the time an exit deal has been landed, some entrepreneurs have already ran out of steam.

After the post-acquisition phase, a start-up entrepreneur can have more time to reflect on life and the next list of achievements he has his eyes on. Whether it’s taking a vacation or building another company, an exit enables entrepreneurs to start anew, like painting on a fresh canvas.

3. An exit can mean that you have disrupted the playing field

Intense competition is commonplace in the field of business. Big and established companies must continue to reevaluate if their offerings are still relevant, or they run the risk of being upended by new start-ups that offer fresh solutions.

But it is another story when a start-up becomes a direct competitor that affects market share. When this happens, big companies have to identify the strengths and weaknesses of the competitor to come up with a new strategy.

Or, if they have the means, they can control competition by offering an acquisition deal.

“If you are able to disrupt a big player, you will get huge offers for acquisition. An example is Facebook acquiring Instagram for $1B,” Esguerra explained. “Instagram disrupted Facebook because it divided the number of users online. Some prefer Instagram over Facebook. So Facebook bought Instagram. Now Facebook owns a bigger portion of the market.” In this equation, Instagram has disrupted the competition field in social media tech enterprise, that Facebook felt the need to buy it.

The Instagram acquisition let investors know that Facebook understood where the market was headed and was prepared to pay money to stay relevant to its clientele, and that Instagram founders  Mike Krieger and Kevin York Systrom are game-changers. Mark Zuckerberg stated that “Facebook is committed to building and growing Instagram independently”, allowing Systrom to continue to lead Instagram. Systrom shared in an interview with Bloomberg, “We got to pair up with we got to pair up with a juggernaut of a company that understands how to grow, understands how to build a business, has one of the best, if not the best, management team in tech and we got to use them as our resource.”

Just like Instagram’s Systrom, a successful exit can allow you to be put in the position of authority as an industry leader. You can opt to negotiate your position within the start-up company you built during the negotiations in preparation of your brainchild’s exit. Not only you can enjoy the financial fruits of your start-up, but you can also enjoy the power of influence within your industry as you gain the respect of investors and your peers. The “exit” in exit strategy is for the money, and not always the startup founders themselves.

Nothing to fear

For some scenarios, it takes a lot of grit and a whole lot of letting go for founders to sell their brainchild. But Esguerra said that this might be a problem in the long run.

“When it comes to acquisition, the problem with some start-up founders is that they do not even think of the exit. They see the business as their baby, as something they never want to give away,” he said.

“Some don’t want to lose control over what they created, or they do not want to sell the business to someone who they think is going to ruin the brand or change the culture of the company they have worked so hard to build,” Esguerra continued.

But Lopez said that this should not be a problem because usually an effective team is still given some control. And if seen in a positive light, it means involving more people, giving room for more thinking heads.

Esguerra further enthused, “I guess the fear with IPO is opening up your business to the public. Once you go public, all your financial statements are accessible by anyone, even competition. The value of your company is also dependent on public perception. The ups and downs of your stock market price dictate your company’s worth. There’s definitely more pressure being a public company.”

In this regard, Lopez said that start-up founders must be ready to embrace changes, as this will be beneficial in the long run.

“Most entrepreneurs understand that an exit can be part of a company’s life cycle,” he shared.

It takes grit to enter the world of start-up. One must keep up with the innovations and demands of not just the consumers but also the investors. In business, the currency of success is mostly reflected in the numbers and figures, not just on the big idea and its execution.

Exiting is not just about crossing the finish line but can be likened to opening new doors where new and bigger possibilities are for the taking.