How to answer, “What is the likely exit for your startup?”

Exit strategies are plans for how founders and investors will “cash out” of a startup. M&A and IPO are the two most common ways to cash out.

• M&A stands for mergers and acquisitions, and it means a larger company will buy you. For example, Instagram was acquired by the much larger Facebook.
• IPO stands for initial public offering. It means you’re going to “go public.” You’ll be like Apple or Twitter — a stand-alone company that floats its company stock on an exchange like NASDAQ.

What are investors really asking?

This question is assessing founder-investor alignment. It’s fair to say that investors will not have the same commitment to the long term as you. That’s why they ask this question. Investors simply want to know you’re thinking about this balance of needs and are actively developing your product, partnerships, and network in a way that will facilitate an exit opportunity in the future.

Your response also answers these underlying questions:

• How much thinking have you done about how your idea fits into the industry?
• Are you looking for a quick exit or are you trying to build something for the long term?
• Will you be tempted by a smaller-scale exit that offers a mediocre return, or have you fallen so in love with you business that you’ll never sell it?

Remember, investors are focused on return on investment, which gets realized upon exit. Investors look to invest in companies that offer a outlandishly positive return in a short-to-moderate time frame such as three to seven years. A good rule of thumb is to assume each class of investor (e.g., Series A, Series B, and so on) will be with you for 5 years.

What investors want to hear.

Investors simply want to hear how you’re thinking about their return on investment. Here is where you should be playing to an investor’s greed. Make sure they leave the meeting with a firm understanding of how your business will make them rich.

Let’s look at two approaches to answering this question.

Bad Answer: We haven’t thought that far ahead. I’m sure someone will want to acquire us.

Good Answer 1: Our vision is to become a vertically integrated manufacturer of eyewear. We plan to open our optical lab in 2018, which we expect will earn us a leadership position in the market. If done right, we’ll have a variety of strategic options by then. (Side note: “Variety of strategic options” means your company can either be acquired by another company or go public.)

Good Answer 2: I think about our exit all the time, and I can’t seem to find any compelling evidence that suggests that this can not be a large, independent, public company. (Side note: Here you’re saying IPO is the exit strategy)

Note: The answers above assume you’ve found product/market fit and are raising a Series A or B round. Be prepared for a follow-up question about who may want to acquire you if you go with Good Answer 1. Investors will be looking for you to name names.