How to Formulate a Successful Exit Strategy for Your Startup
Here’s why getting acquired might be the best exit strategy for your startup.
By Carter Reum
March 12, 2020
Your company has finally achieved this amazing success you’ve been working toward.
You’re looking to cash out.
Yes, you deserve it. But you’re not quite finished. The most critical stage is still to come: the exit.
Despite what many believe, founders don’t simply hand over the reins in exchange for a massive payday. Sounds great—but it’s more complicated than that. Here’s the deal. Exiting is actually a strategic decision—one founders should be aware of early on.
We’ve invested in over 100 successful startups and founded our own açai-infused vodka company, VEEV. We learned lessons the hard way. Now, we’d like to make it easier for you.
Most founders overlook a simple but critical fact. Potential buyers need a reason to buy your company.
First, you need to understand how your company is positioned for an attractive acquisition. There are plenty of areas to focus on to ensure a successful exit. Mastering any of these can greatly improve your odds:
Access to a particular demographic
What about revenue?
Yes, revenue is important. However, potential acquirers rarely buy a company based on it. Odds are your incremental revenue barely moves the needle.
While revenue—especially revenue growth rate—is important, the three aforementioned areas carry more weight. Let’s discuss some strategies using real-world examples.
Create a nimble distribution model that can't be easily replicated
PetSmart’s acquisition of Chewy for $3.5 billion in spring 2017 is a great example of a purchase based on a distribution model. PetSmart, the brick-and-mortar retailer of pet supplies, needed Chewy, an e-commerce provider of pet supplies, for its direct-to-consumer channel. In the end, PetSmart gained critical online access, while Chewy received the expertise and resources necessary to refine and expand its business. A true win for both parties.
Offer access to new demographics—especially millennials
Consider RXBAR, the maker of simple ingredient protein bars. Founded in 2014, the company experienced meteoric growth. This is due (in no small part) to millennials being attracted to RXBAR both for its clean labeling and ingredients. Food manufacturer Kellogg’s (eager to enter the space) announced in October 2017 its intention to acquire RXBAR. RXBAR has remained an independent company within Kellogg’s while continuing to expand its product. Meanwhile, Kellogg’s has the chance to effectively leverage access to RXBAR’s target demographic. Again, a win for both.
Build an unbeatable brand image
It’s impossible to overstate the importance of brand image. Corporations are constantly seeking ways to capitalize on emotion-based purchasing.
Because corporations—not just consumers—are looking for products that evoke emotion. And frequently, this isn’t necessarily a “big company” area of expertise. Corporate competitiveness traditionally lies in the form of having a cost advantage.
These days, they’re looking to acquire companies that supply an emotional one.
Cultivate the right vibe that others will want to acquire
PepsiCo’s acquisition of the sparkling probiotic drink maker, KeVita, is a prime example. KeVita’s slogan, “Revitalize from the inside,” represents the feeling PepsiCo was looking to capture. At a time when consumers are turning away from traditional soft drinks, PepsiCo found the perfect opportunity with the health-conscious KeVita.The acquisition offered KeVita a larger stage, providing increased access to new distribution channels and resources. PepsiCo acquired the means to leverage KeVita’s image—readying itself for changes in consumer behavior.Yet again, a win for both!
Determine early on what makes your company a threat to potential acquirers. Do they need you more than you need them? If so, you’re well-positioned.
Now that you know what to focus on, let’s tackle balancing your company’s operations with the intricacies of an exit.
Determine which operational milestones matter
When it comes to selling your company, what’s the best way to position yourself? Two pieces of advice come to mind:
Base your exit on operational milestones, not a timeline
Keep potential acquirers in the loop
This principle can be applied in greater context, especially when it comes to fundraising. All too often, founders seek a certain amount of capital to grant them X months or runway. Instead, they should raise enough capital to reach a particular milestone, such as a customer acquisition or hitting a specific revenue target.
The same can occur with exits.
Founders often become too focused on exiting in Y years—not based off of a given milestone. A major reason we sold VEEV was because we realistically could not keep growing the business. We had reached an intermediate size and realized that we didn’t have the distribution capacity or necessary connections to expand VEEV internationally.
This telltale milestone was far more helpful than any time-based method in determining the right moment to sell. Additionally, milestone-based exits are more flexible. They account for unpredictable macroeconomic factors that can expedite or slow your timeline.
Begin laying the groundwork to build relationships with potential acquirers long before you reach your desired exit milestones. Keep them in the loop from an early date.
There are few reasons for this.
First, it’s important to get your foot in the door and establish relationships with corporate partners early on. The second (and equally as important) reason is that these potential partners can help you to reach or tailor your operational milestones.
Essentially, your potential acquirers can outline the kind of milestones that make your company an attractive acquisition target.
The above advice should go without saying, but founders often don’t want to share vulnerabilities—and we’ve seen this adversely affect many deals.
Realize that this process takes time
Corporations tend to move slower than startups. You should be in discussion with companies at least a year before any intention to sell. Know that exit deals can take at least six months to hammer out.
In the end, it’s no secret. Exiting is difficult.
Applying this advice will help you differentiate yourself from the competition and increase the odds of gaining the attention of an acquirer.
The earlier you start, the better your odds of success.
From experience, we realize that timing is never perfect and an ideal match is rare. With that said, it’s important to always keep the exit in the back of your mind. Explore all the ways to capture the value of the business you created.
Now, get to work!
And if you need any help along the way, check out some great resources from people who have been there and done that.