Exit Strategies for Mature Companies & Startups
Date: Tuesday , February 21, 2017
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Startups in general are facing a lot of validation in the marketplace today. The question being asked by many investor or industry pundits is the begging question - Are startups in general programmed for failure? Now, this is not fiction as the writing on the wall is very clear and for a long time at that. While the industry has witnessed the momentum among several startups taking shape in recent years, unfortunately, most of them are incepted simply for the purpose of receiving funding or getting acquired. This is clearly a recipe for failure.
Startup founders on their part are burning the midnight oil trying to develop compelling arguments for scaling their respective businesses. While the intent is very much evident, are they committed enough to scale sufficiently for their investors and stakeholders? Investors on their part are increasingly scrutinizing every step of the startup to avoid failures, very often resulting in complete business pivots, which is a sea change from the original business idea.
While this reflects the general market sentiment and is frowned upon generally, this is also the stark reality for such businesses. With this backdrop, exits are commonplace today in the startup ecosystem. Exits from a fully controlled operation require considerable planning. Let us analyze the various exit strategies that are an option today -
Initial Public Offering (IPO)
An IPO is an option for a mature company that has already scaled considerably. Through an IPO, one can sell a part of your company as shares and raise money as well in the process. The company management can continue to operate the company under strict guidelines laid down by the market regulator. This also means that one should be open for regular scrutiny and adapt to regulations that work towards making the company profitable for investors. Example: Infibeam\'s initial public offering.
Acqui-hire or M&A
Once a startup achieves reasonable scale, many larger companies that are in the same space or in complementing businesses are on the lookout for acquisitions. This can happen as a complete acquisition of the company, its assets and its resources or in some cases Acqui-hire, where the resources are absorbed into the larger company. This is typically a win-win for both companies, and the promoters of the acquired company arrive at an arrangement that is mutually beneficial. In Indian startup ecosystem, there are ample examples such as Flipkart acqui-hiring Appiterate, Newshunt aqui-hirig Vauntz India, and Holiday IQ acqui-hiring Source N India.
This is when another company acquires your company which is listed by buying out a controlling stake of the shares and stocks. This would mean that you lose operations control of your business as a result. However, you can liquidate by offloading part or all of your shares in the company in this process. Some of the examples are Flipkart\'s acquisition of Myntra, Snapdeals acquisition of Freecharge, and Practo\'s acquisition of Qikwell.
This is a preferred route by many startups that have failed to scale up beyond a point. In this process, you typically have reached a point in your startup journey when you have decided it is time to move on. You then identify someone who has more prowess in running your business and sell out to him completely. You may have to take a hit at certain levels, but your negotiation and selling skills will come to the fore to settle on a good deal.
Liquidation & Close
Often startups reach a stage when they realize that it was a bad idea or the market is not ready for the concept as yet. Founders should be smart enough to realize this before it is too late, as it takes toll on your finances and peace of mind. In today\'s day and age, shutting shop is not a bad word like it used to be in the past. With the growing momentum for entrepreneurship, often the best brains in the business can have a bad day at office requiring them to close their business. Taking a decision on shutting down one\'s business or liquidating is a critical part of the entrepreneurship journey today.
Advice for Startups on Exits
Considering the prevailing situation where IPO exits are rare for startups and M&A are largely equity swaps, it is recommended for startups to employ business models where unit economics is visible and positive even in the short run. Business models which have strong operational efficiencies and operating in large markets with positive unit economics, can look forward to a cash exit (not equity swap) from either private equity players or strategic players who find this business complimentary to their offerings.
On another note, success and failures are common place in a business and particularly in an entrepreneur\'s life. Timely course correction or decisions to pivot or exit will be crucial to the success of a concept or a company. Startups on their part must understand the importance of this phenomenon and take decisions judiciously. While a concept might be good, are the promoters capable enough to build it; probably it is best left to others. These decisions can be emotional at times but must be taken in the interest of the company and its opportunity.