Final Stages of Startup Funding: Tips for Successful Exits and Acquisitions
Learn how to prepare for the final stages of startup funding with our expert advice on exits and acquisitions, maximize chances of success and secure the best possible.
By teammarquee . March 17, 2023
You put in a few years of arduous labour to create something worthwhile, and one day you unexpectedly receive an acquisition offer for your startup. You’re overjoyed but aren’t really ready. You put everything else aside to concentrate on this chance. Starting exclusive due diligence, your business is a shambles (IP, contracts, burn). Days become weeks and weeks into months. You’ve ignored fundraising and business. Money is becoming scarce for you. Now your only choice is to opt for mergers and acquisitions.
Depending on the stage of a company’s development, various startup businesses have different financial requirements. In the first few years of a startup, venture capitalists, business angels, and other types of investors don’t often seek an exit, but between years 5 and 10, they may start to get concerned if an exit policy is nowhere in sight. We often learn about fundraising for startups when they are in their growth phase but rarely talk about their exit policy. But the truth is while most startup businesses dream of becoming the next unicorn, the investors start looking for an exit after the initial few years. When investors pump money into your businesses, they only have one goal: to receive an adequate return on their investment.
So, what exit choices and tactics are available for businesses and investors? Let’s find out.
Exit Strategies for Businesses
Selling the business to a larger one for a profit is the primary exit strategy for entrepreneurs. Investors are in the same boat. Key executives and workers from the startup will remain at the firm until they cash out their shares when the buyer acquires the firm. Exits provide startup investors with money, which they can subsequently give back to their limited partners or to themselves.
Acquihires are merger and acquisition types that combine hiring and acquisition and are highly popular in Silicon Valley. In this situation, the buyer is more interested in the team and the talent than in the product itself, making it crucial to work with a development partner that has a scalable team.
There comes a point for mature and established technology companies where raising finance from VCs or private equity firms is no longer an option. What follows, then? An IPO.
The initial public offering, or an IPO, is the process of fundraising wherein a firm begins trading on a stock exchange and sells a sizeable portion of its shares to raise funds from institutional and non-institutional investors. These big businesses are what VCs want to invest in since they frequently deliver significant amounts of funding to all parties concerned (founders, early employees and investors).
The fact that more and more startups are delaying their initial public offerings (IPOs) is an interesting trend in the startup sector. This results from the large quantity of funding provided by venture capitalists, private equity companies, and other investment institutions in the startup market.
Mergers and Acquisitions
These deals, sometimes called M&A deals, typically entail a merger with a different but bigger firm. Big businesses searching the market for complementary capabilities frequently look for M&A deals as a form of exit. Purchasing a smaller startup is a better product development method than developing it internally. There were just 4 mergers & acquisitions in Europe during the first half of 2014, but these deals are gaining a lot of popularity lately.
In the first half of the previous financial year, there were 2274 merger & acquisition deals with a total value of $2 trillion. These figures were reported despite the geopolitical turmoil, volatility in commodity markets and growing inflation. These recent mergers and acquisitions have acted as the strongest exit strategies for businesses as they can maintain control over price negotiations and set their own terms. Businesses can also take m&a consulting to streamline merger processes and ensure a high valuation.
Milking the Cow
When startups are raising capital for businesses, not all of them can obtain capital from VCs and business angels (bootstrapping is an option). Similarly, not every startup needs to sell itself to a larger firm to generate a profit for its founders, staff, and investors.
Not every business needs an IPO for raising capital; some of them can reinvest a portion of their profits into their business. Businesses that start with a great startup idea and can build a strong business model and scale may decide to remain independent and reinvest their revenues in the firm. A portion of those gains may also be divided as a dividend among investors, giving liquidity to third parties while avoiding the public markets and the associated liabilities.
Perfect time for selling a startup?
This topic is frequently posed at conferences and in-person meetings between investors and startups. How soon should I sell my business? When should sellers start looking for buyers? When should I, as an investor, begin seeking for a return on my investment?
The fact is that there is no single answer to all of the questions mentioned above. According to common sense, entrepreneurs should seek an exit when their growth rates are strong rather than when they are highly profitable if they want to maximise their selling price. Both sides must strike a balance since startups want to sell for as much money as possible (as do investors), while buyers want to spend as little money as possible.
Every investor and entrepreneur should think about the specifics of their projects and base their decisions on those. There is no magic recipe, but it is a given that business owners and investors will eventually search for a way out.
Buyers in recent mergers and acquisitions stated that they typically hoped the founders would stay with them for many years when questioned about what happens following an M&A or IPO. Buyers prefer frequently rewarding the former founders with re-vesting, earn-outs, or shares of the acquiring firm. IBM brought up a security firm, Neville, whose founder is now in charge of one of IBM’s biggest divisions.
Any block of shares sold by founders in the event of IPOs, which are purportedly the ultimate “exits,” are subjected to intense scrutiny and may result in a price decline.
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