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Why an exit strategy is important for startups


Startup & Entrepreneurship

Why an exit strategy is important for startups

In several interviews, Reserve Bank of India Governor, Raghuram Rajan  has stressed on the need of having an exit strategy for startups.

There are a number of reasons why a startup might choose to close shop and exit the game. Current market dynamics make it extremely difficult for startups to profit, let alone break even. Once the startups expand and acquire good funding and big investors, business slowly transfers from being fun and exploring to appeasing the investors. Meanwhile, several investors come with various conditions and stake on the company. By the time startups increase their valuation through major funding, original founders often retain lower stakes in the company than they started out with.

Often times, timing and sheer market forces make it difficult to sustain the operational aspect of a business even though the business model might be very good on paper. Also, several startup founders derive more joy from founding new business models, sculpting and structuring them into operation and then selling them to move on to other new business concepts, all of which are perfectly justified.

Having said this, there is no one statement on exactly when startups should adopt an exit strategy. The reason differs from company to company and entrepreneur to entrepreneur. However, being aware of the strategies that will help the entrepreneur exit without incurring heavy losses is of importance in erratic market conditions. In recent times we have seen startups such as Tiny Owl, Pepper Tap, Grofers, Zomato, Common Floor and others closing down or downsizing in a major way for various reasons. While several of these brands may not be looking for an exit strategy, it is only practical that all entrepreneurs everywhere never disregard market shifts.

There are several ways in which a full or partial exit can be made. Mergers are prevalent in the market, as well as acquisitions where usually a third person decides the price of acquisition, making it profitable to the startup. A few companies do go IPO but that is feasible only when they are backed by huge, professional investors who already own the majority of the company. Selling your startup at a good price to someone (sometimes, even an investor) is a good plan although that may mean absolutely no eventual involvement with their own brand in the future, a fact that would hurt any founder.

Several companies keep an exit strategy by never going large but keeping their company to a medium to small scale. Bringing in big investors mean having to give the investors an exit strategy as well or the entire point of investing is defeated. Also, big investors can mean lesser control over the company. Therefore, a few startup owners prefer to keep it small and completely individually owned where they draw a large and cushy income and maintain the business on their terms. In times of market distress they wrap up their business by simply allowing the business to run its course and cut out any aspect that sits too heavy on the business.

Just in case nothing works some companies are forced to liquidate, pay off creditors and exit the market with whatever dividends they can gather.

While exit strategies are usually seen as a sign of failure in business it need not really be so. Like everything else a business is also subject to various forces that are beyond an entrepreneur’s control. Having an exit strategy can actually help entrepreneurs cut their losses and gear up for the future.

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