VC-Pitch Strikes: Exit Strategy

“Tell us about your exit strategy.”

As an entrepreneur pitching an investor, you’ll always get a question on your exit strategy. The question reflects a major VC risk assessment, is one of the most important questions you’ll be asked by a potential investor, yet many founders fail to address it convincingly.

Some egregious strike-outs I’ve seen include:

We are building this company for the long-run/to be huge.

We intend to take this all the way to IPO.

What we really care about is changing the world.

Google/Facebook will buy us.

This is an awesome business and we’re in no hurry to sell.

Lets unpack the question. The investor is asking you two things:

1. How do I (the investor) make money?
2. How much thought are you giving to building a company than can be sold (or IPO’ed, but this realistic only for later-stage financings) rather than just building an excellent and profitable company or product?

Especially at the seed and early stages, the question is understandably hard to answer for an entrepreneur. The entrepreneur should in fact be spending most of his or her time building an excellent product, developing or penetrating a market, and following the money to understand what they can sell to whom and for how much.

Its also a hard question because there is so much uncertainty around the future at the early stages if a start-up that pondering exit scenarios seems like an exercise in fantasy and a distraction from all the hard work need to get to the goals above.

(Also, people are just plain bad at planning endings, in general. This is definitely worthy of an article in itself!)

It is surprising how many founders, especially those that see themselves as mission-driven, changing the world, or only product-driven, are tone-deaf to their audience when pitching investors. Venture investors are in the game as financial players, not as philanthropists. We only get paid when a company exits, unlike employees and management of the company, who benefit along the way as well with jobs, a mission and purpose, and pay as well. So when a CEO tells his investors he wants their money to build something from which she and her employees will benefit, but is punting on how to pay this back, it doesn’t make the investment attractive.

So what is wrong with the answers above? If you’re seeking venture funds, you ought to be building a company to be huge, and even IPO. But investors need to know that:

1. You are able to look at the situation from their point of view and understand how they get rewarded for investing in you.
2. That you’re willing to do the homework of envisioning the exit scenario for them, understanding markets and players in your space, rather than leaving it to the investor to imagine that. You’re the expert (this is another VC-Pitch Strike out I’ll write about).
3. The investor want to make sure that you have what I call a credible flight path, meaning that if you execute to your plan and conditions are what you predict your start-up will end up flying rather than crash at the end of the runway. You need to make your case that if things go according to your articulated plans, the investor will make a return commensurate with risk (and greed).

Best Answers

A CEO that recently pitched me gave me a non-standard by compelling answer to this question, basically:

“We’ll do more revenue in the next year with a major client and their competition than the valuation we’re asking for and are already in acquisition talks with them.”

But in general, the best answer to this takes into account detailed knowledge of the customers, value proposition to them, competition, and exit multiples for companies that have achieved the positions (goals, milestones, size) that the startup is looking to fund with this raise and subsequent planned ones. So ideally some version of:

“This raise takes us to a revenue of X with a Y% market share, positioning us for a subsequent capital raise of Z, taking us to a position just like competitors A, B, and C, who were acquired by M and N at a multiple of R to revenue.”

You’ve then established what the market would be for the company you’re shooting to be, and leave the investor with two downstream things to determine for themselves. Is your plan to get to the exit credible? Is the payoff sufficient to compensate the investor for the inherent risks in your plan?

I’ve spent 13 years as an angel investor and advisor, and 8 as a VC. The “VC Pitch Strike” series discusses common missteps I’ve seen entrepreneurs make when pitching, that these musings may help you avoid.

A version of this article was published on Linkedin.