How to Answer the Question: "What's Your Exit Strategy?"
Let’s get started by restating an important lesson from our last Dreamit Dose on How to End Your Pitch with Vision. Remember: your exit strategy does not equal your vision. Founders need to understand and articulate the difference because both terms have distinct meanings. Vision is important because it helps early-stage investors understand your key milestones and ultimately where your venture is headed. Venture capitalist Ron Gula knows this well. In his five slide pitch deck, he reserves one slide for vision. What he doesn’t include, though, is a slide on exit strategy. Why? As Steve Barsh, Managing Partner at Dreamit, puts it, “Investors want missionaries, not mercenaries.” When the going gets tough, they want someone who’s in it for the ride, not for the quick buck. Of course, liquidity matters to investors. They will ask you about the exit, but you should not bring it up proactively.
So what are investors looking for when they ask you, ”What's the exit strategy?” Here are some key insights to keep in mind.
First, they could be testing you. For instance, Ron Gula tests founders by proposing, “Look if you’re raising $2M on an $8M pre-money valuation, why don’t I just write you a check for $8M?” Sure, some investors could possibly be planning a buyout but most likely it’s a test. Investors want to know: Are you playing small ball? How big are you thinking this could be? So if you’d sell at that point, you’re signaling the wrong signs.
What should you say instead? Say you’re not sure. You have no idea how this will end. Say you’re meticulously committed to this company hitting future milestones and you’re looking to work with an investor who believes in that vision. Someone who will help you build something big and dominate in the space. If you focus diligently on metrics that matter, liquidity will come in accordance with the milestones you’ve mapped out. This may include possible acquirers, but now is not the time to turn over the keys. If investors ask you directly, it’s ok to list possible acquirers. They are looking for competency signs in your industry and venture acumen.
Let’s recap. When investors ask, “What’s the exit strategy?”
Don’t forget it could be a test. They’re not looking for small ball or flash in the pan, they’re looking for an entrepreneur who can hit a home run and is in it for the long haul.
Acknowledge that you can’t be sure, but your goal is to stay diligently committed to sustainable milestones, build a company that dominates the space, and believe liquidity opportunities will follow.
Don’t proactively discuss acquisition. Only list possible acquirers if you are explicitly asked and make sure you have a justifiable rationale for your expectations.
Early-stage investors will probably ask you about your exit strategy. Don’t fall into the traps of thinking small or leaving the party too early. You’re building the right venture for the right reasons so use exit as an opportunity to let that shine.