<Understanding the exit criteria’s of Venture Capitalists and Angel investors:-💱💰>

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The Early Bird’s Club

10 min readAug 9, 2021

📌The entrepreneurs who basically look at angel investors or venture capitalists in order to raise their capital for their new start-up businesses can be a little bit difficult for finding such investors, and when they actually find them, it becomes tougher for getting the investment out of them.

Basically, the angels and venture capitalists (VCs) carry on serious business risks for the entrepreneurs in order to perform more effectively in the business platform. New business ventures basically have little to no sales and thus, the founders may usually have only real-life management experience, and the business plan which is basically dependent on nothing more than a simple concept or a simple prototype. Therefore, there are plenty of good reasons why venture capitalists are tight with their investment money. Despite facing the enormous amount of business risks, venture capitalists usually fork out lots of money from the tiniest money and untested ventures with the hope that they will eventually transform into the next big thing. In the case of mature companies, the process of establishing value and the exact amount of investment is fairly straightforward. The established companies basically produce sales, profits, and cash flow that can also be used for arriving at a fairly reliable measure of value, and for the early-stage ventures, the venture capitalists have to put more effort in order to get inside the business and the opportunity. Taking care of the management platform is basically referred to as the important factor that smart investors take into consideration. The venture capitalists basically invest in a management team and on its ability in order to execute the business plan, first and more in a further way and they basically look for those managers which are ideal as business executives and who have successfully built businesses that have generated high returns for the investors. The businesses that usually look for venture capital investment would basically be able to provide a list of experienced and qualified people who will play central roles in the company’s development and those businesses that lack talented managers should be willing to hire them from outside. The bigger the market size, the greater the likelihood of a trade sale allows the business even more exciting for the venture capitalists who look for potential ways in order to exit their investment.

In order to demonstrate for those businesses that would basically target large market sectors, the market opportunity is very important for grabbing the venture capitalist’s attention. In order to receive the large returns that they basically expect from investments, venture capitalists generally want to ensure that their portfolio companies have a chance of growing sales worth hundreds of millions of dollars. Investors basically want to invest in great products and services with a competitive edge that is long-lasting and they usually look for a solution to a real, burning problem that hasn’t been solved before by other companies in the marketplace. Investors usually look for a competitive advantage in the market and they want their portfolio companies to be able to generate sales and profits before competitors enter the market and reduce profitability. The fewer direct competitors operating in the space, the more it is better for their platform. Thus, a business exit strategy is an entrepreneur’s strategic plan in order to sell their ownership of a company to other investors or another company. An exit strategy gives the business owner a way to reduce or liquidate their stake in a business platform and, if the business is successful, it makes a substantial profit. If the business is not successful, then, an exit strategy or (exit plan) enables the entrepreneur to limit its business losses and it also is used by any investor to prepare for a cash-out of an investment. The exit strategies and other money management techniques can greatly enhance the trading of many investors by eliminating emotional and reducing huge risks. Before entering a trade, an investor is basically advised to set a point at which they will sell for a loss and a point at which they will sell for again. Business angels achieve their financial returns through exits. They make investments in early-stage companies, usually taking a minority stake, and rely on the entrepreneurs they back to deliver value. But they only achieve a financial return when their shares are sold. This requires a ‘liquidity event’, normally through the acquisition of their investee company by another company.

The need of exit strategy in the business platform:-

The exit strategy is basically referred to as the contingency planning part which is usually executed by certain investors, traders, venture capitalists, or business owners, in order to liquidate a certain position in a financial asset or disposing of tangible business assets which are once predetermined criteria or either, has been met or exceeded. An exit strategy may be executed to an existing non-performing investment or closing an unprofitable business and it may also be executed when an investment or business venture has met its profit objective. For example, an angel investor in a startup company may plan an exit strategy through an initial public offering(IPO). The effective exit strategy should be also planned for every positive and negative contingency regardless of the type of investment, trade, or business venture and this planning should be an integral part of determining the risk associated with the investment, trade, or business venture. For startup businesses, successful entrepreneurs plan a certain comprehensive exit strategy in case business operations do not meet predetermined goals. If the cash flow draws down to a point where business operations are no longer sustainable and an external capital infusion is no longer feasible to maintain operations, a planned termination of operations and liquidation of all assets basically becomes the best options in order to limit any further losses. Most venture capitalists insist that a planned exit strategy may be included in a business plan before committing any capital and thus, many business owners or investors may also choose to exit if a lucrative offer for the business is tendered by another party.

Importance of Business Exit Strategy:-

a) Owners become weary:: Forming a business company and transforming it into a successful and profitable is a challenging part. At certain times, the entrepreneurs need to wear many hats before they can earn enough profits to invest in recruitment and training. Considering the amount of effort that business owners put into these ventures are often unwilling to delegate tasks. They work for a long time looking for new clients, marketing their products, and recording the business finances. A business exit strategy ensures that company managers have systems in place for recording essential information on a regular basis.

b) A better understanding of revenue:: An exit plan basically requires consistent and up-to-date data regarding the business’ performance which means that the company owners will always have a good understanding of their revenue streams and cash inflows and outflows and determine the activities which bring the most revenue and how it is spent. Having an exit strategy allows the firm owners for deciding whether they should go after short, medium, or long-term income projects. If an individual intends to exit the business within the next few months, he can focus his efforts on activities that bring in cash quickly.

c) Developing leadership:: Whether a company intends to sell its business or pass it onto the next generation, leadership can make or break this deal. To ensure that the transition is a success, the firm owners should outline the chain of command that is to be followed upon exiting and this plan also lays out the basics of company decision-making. When a longtime manager or leader leaves, some firms end up in chaos with numerous stakeholders fighting for power. By having an outlining succession plan, the firm owners help to minimize such risks and ensure that the business continues to thrive longer.

d) Smooth operations:: The exit plan gives all the information which the company’s successor would need in order to run its platform and thus, the new investors or managers won’t waste their resources collecting basic information regarding employees’ salaries, finances, and partners. If the business exit strategy contains all the necessary information, the successors can hit the ground running as soon as the company leader leaves.

Certain exit strategies that angel investors and venture capitalists basically considers:-

a)Lifestyle company exit:: The Lifestyle company exit prioritizes the profit of the owner without a clear plan for future expansion. By keeping the business expenses at a minimum, the business can pocket a majority of the profits rather than putting much into helping the business grow. It works best for small or medium businesses, allowing them to dissolve the company when it’s no longer turning a profit. They also need to keep in mind that this method generally works only if they have a good revenue stream and have partners that are on the same page as their platform.

b)Mergers and acquisitions(M&As):: The M&As are ideal for any new company. Start-up companies, in particular, look forward to the day where they will be able to sell their controlling interest to a larger, more profitable business. In this type of exit strategy, owners are often still in the picture of a post-merger. We can make sure that the trust whoever is acquiring their company has your company’s best interest at heart. The company may be acquired by a larger company through the merger and in acquisitions, the acquiring company makes a tender offer to all shareholders to purchase their shares, often in cash at a premium over what investors paid.

c)Initial public offering (IPO):: IPOs are the best methods for selling shares of stock of our privately owned business to the public. It basically means that a company starts floating on a stock market, selling a significant number of its shares in the process to institutional and non-institutional investors. The large companies are that VCs dream of, as they often provide large sums of capital to all parts involved (founders, early employees, and investors). This type of strategy brings in large amounts of cash within a short period of time and you also need to make sure that business conditions exceed the expectations of the public.

d)Liquidating:: Liquidating as an exit strategy is where you close your business and sell all of your assets typically at a lower cost. If the business chooses this route, then, they need to use the cash for paying their shareholders if there are any as well as eliminate any debts. With liquidation, business operations end, and their assets are sold. The liquidation value of their assets goes to creditors and investors. It is a clear-cut exit strategy because they don’t have to negotiate or merge their business.

e) Make in form of the cash cow:: If the business is in a stable, securing marketplace, with a business that has a steady revenue stream, pay off investors, find someone which they can trust to run it for them, while they use the remaining cash to develop their next great idea. The business can retain ownership and enjoy the annuity. If you can convince investors that your startup will generate a solid revenue stream, and the market won’t go away any time soon, they may see an opportunity for an even larger return and you can maintain ownership, and even find someone you trust to run it for you, as you focus on spinoffs.

f)Management buyout (MBO):: In this case, the company’s management team purchases all the assets and operations of the startup in question. It means that VCs get their money back straight from the startup instead of searching for new investors and going the M&A or IPO route. It is done so that a business can streamline its operations and enhance profitability but requires quite a substantial amount of financing (usually a combination of personal resources, private equity, and other funding).

Thus, exit plans are very much crucial for ensuring that business firms transition runs smoothly to the new management and having an exit strategy also makes it easier for keeping tabs on the company’s finances. If an individual intends to sell his or her business later, then, he or she will have to present the firm’s revenue history and performance metrics to prospective buyers.

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<Understanding the exit criteria’s of Venture Capitalists and Angel investors:-💱💰>

Written by Dona Ghosh Dastidar