When talking about the possible exits for a startup, we usually associate this concept with its sale to a larger company or its IPO. However, we usually talk about “exit” in a wider way referring to any of its possible endings.
Exit is any method that helps one or more founding partners or investors to abandon or sell their participation in the company, either because they have reached the financial objective that they had set before, to avoid greater losses or due to the liquidation of the startup.
In the startup ecosystem, the fact that a founder has had an exit in different companies usually has positive connotations even if some have not performed well.
At The Startup CFO we have written this post with the aim of letting you know what the possible exits of a startup are and which are the cases that occur most frequently.
1- Make the startup profitable
It occurs when private investors start to obtain profits derived from the annual dividends distribution.
Normally all startups initially need large private financing investments to develop their business model and attract clients in order to accelerate their growth.
It is not usual that private investors want to remain part of the company up to this point since they prefer to sell their part to recover a multiple of their investment, so this situation does not usually happen or initial investors leave before it does.
2- Becoming a zombie company
When the startup does not fulfill the plans that investors expected, it is difficult for them to get new funding and the company cannot cover its growth investments,, it usually becomes a “zombie” company.
A zombie company is one that chooses to drastically reduce expenses by reducing the workforce (as is the case with a traditional company in distress) as a solution to its financial problems.
This situation usually occurs when the company is going through a difficult time and wants to avoid bankruptcy, but makes it very difficult to grow their business again after letting go part of their staff.
3- Sell the startup to an incumbent company
This situation occurs when the startup had sustained growth over time and another established company in its sector with higher turnover buys it.
It is one of the optimal endings for any startup because it tends to bring significant benefits to founders and investors. In this case, your profitability multiple is usually quite high. It is a common ending in Europe among startups that are successful since its founders sell it for a large amount of money, something that is often announced in the press as a great success story.
4- Go public (IPO)
It is a fairly common ending in the US among successful startups and is still rare in Europe, although the trend has been increasing in recent years.
This situation occurs when the company goes public, at which point any private investor can buy and sell its stocks.
It is the dream of many founding partners because the valuation of the startup usually becomes much higher than in private markets.
5- Leave the company
This situation occurs less frequently when investors consider that the founder is no longer the right person to run the day-to-day of the company and therefore buy his shares to replace him with someone who is more suitable.
As the founders sell all or part of their shares, it is known as a partial “exit”.
6- Repurchase of shares
It occurs when the founding partners buy the investors’ shares in exchange for a certain return in a certain period of time. One notorious case was Buffer in the US, although this is not frequent at all.
7- Bankruptcy of the startup
It occurs in 90% of the cases, so it is usually the most common ending. It happens when the company does not meet its financial objectives at some point in its life cycle, either due to lack of funding or because its sales are not enough.
If it has been a long time since the startup was founded, it is more common for the startup to become a zombie company or a sale at loss.
We recommend creating a closing plan in the shareholders agreement to know how to act in case of reaching this scenario.
Do you need help?
Having the right person with wide knowledge of the problems that your startup can face in any stage of its life cycle can help you carry out better financial planning and make a difference in the future of your company.
The figure of an external CFO can also analyze your project in depth and prepare a detailed business plan in order to find new investors, since they will also have experience and contacts in the sector.
If you are thinking of hiring any of the services that we can offer to your startup to maximize the chances of success, you can write us an email at firstname.lastname@example.org and we will be happy to see how we can help you.