Exit strategy questions for startup fundraising

Exit strategy for investors questions: What venture capital startup interview questions will be asked

This is the first part of a series of exit strategy for investors interview questions. We cover almost every question an investor will ask you, so you are totally prepared.

Unlike resources on the internet that just provide a few questions, this resource is unique as:

  • We provide the insight into what the questions actually mean (They can be sneaky)
  • Almost all the questions you will be asked, rather than just a few indicative ones
  • Examples of what to actually say!

This installment is on your exit strategy for investors. Venture capitalists need you to make a big exit to make their business model work and for you to have a plan for that to happen. This is an area that very few founders give time to, which is ironic since it’s the only thing that investors really care about! If you read all of these and do your homework, you should be able to deal with every curveball thrown at you!

exit strategy for investors

We need feedback to make this as useful as possible. If there are any questions we may have missed or improvements to answers, sound off in the comments so this can get better for all founders, and even investors looking to build up their knowledge.

If you want to get updates on each installment and to get a PDF version of the exit strategy questions, download the PDF here, and I’ll email you when the new questions are up for you to be a total pitching pro.

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Exit strategy for investors

Question: Who is going to buy this?

What they mean

Let me tell you a secret. You aren’t going to IPO. You are going to sell to someone if you make things work, though you have a 0.00067% chance of that happening. Startup isn’t solving problems for customers. WTF you are thinking..? So what is startup? Startup is outsourced innovation for corporates.

Corporate are the ones that will acquire you. They will acquire you to solve a problem they have. You set up to sell out- well you have to once you take money from investors.

There are two types of acquisition: strategic and financial. Financial is the worst, relatively. You get bought to add revenue or users. Strategic is where the big money is. Think Whatsapp, Instagram, and Youtube. Facebook and Google had a problem and they bought to solve it. Facebook had a mobile problem and Google couldn’t win against content so bought users for the first time in their history (The acquisition of $1.5b was a lot at the time but they are making $4b in ads this year). 

Now back to VCs. Once you get money a clock starts ticking. That clock ticks out in 7 years.pitch deck

VCs really care that someone is going to whisk you away. Their business is ‘buy low sell high.’ Someone buying you and for a high price is their business model. Someone acquiring may matter to you, but it’s all that matters to a VC. That’s it. All that ‘value add’ is about juicing valuation, mitigating failure risk- not being nice to you. 

Being acquired matters. You get invested in to sell out. You start up and raise money, then you have to sell out.

If being acquired is so important, shouldn’t you plan to sell out and to whom?

You need to have an idea as to whom the potential acquirers will be and that there is a depth of them. It’s fine if you are at an early stage to not be 100% sure what the future will look like, but with your current business model, you need to know who could, broadly, buy you.

The longer you execute and the more money you raise, the larger your asking price will be (and dilution), so that progressively limits the acquisition pool over time. Therefore, you need to think of being acquired not only generally, but who could buy you for $50m, $1bn, and everything in between. The number that can buy you for larger sums decreases on a log. A lot of people have $50m in cash, few have $1bn+ (even in stock).

VCs are going to do thinking about this, for sure, but you need to do some thinking up front too. You do not have to be right, you just need to not sound stupid. I wouldn’t spend a day thinking about this, but I would certainly brainstorm for an hour.

What you need to say

Do some homework. Have at least 5 potential buyers or 3 categories of them. Using categories is smarter since you appear structured. You can mention a few companies per category and let investors fill in the blanks themselves. Ideally have a few that are not obvious, meaning not Google and Facebook. It’s fine for the acquirers to be local, particularly if you might be able to sell earlier for less, but still giving the VC a good RoI (RoI is time dependent).

“The team and our advisors went through an exercise to think about this question. We know it matters to us and it’s super important to you.

In the shorter term, other ad agencies make a lot of sense. We would be able to provide geographic coverage and access to great clients for them to cross-sell with their broader range of products.

Longer term there are three categories. Carrot vendors, pancake flingers and pie throwers. In carrot vendors, WPP and Uber may make a lot of sense. In pancakes, McDonalds and Bank of America are candidates. Finally, in pies, Waitrose and Tescos. We would have to hit our plan to be sizeable for them to consider us. We hear they need us to make a min of $15m EBITDA a year. We think we will hit that in year 3.

We would love to have your views?”

exit strategy for investors

Question: Why is someone going to buy this?

What they mean

The investor wants to know why someone is going to buy you, rather than just whom. What value are you building that will be worth their consideration?

No one is going to buy you for goodwill. They buy you for either:

1/ financial, or

2/ strategic reasons.

If you are a financial buy, you need to make a lot of money and free cash flow, or high top line revenue.

More likely is a strategic reason, such as they broaden their client access, generate cost synergies, revenue synergies, or even to help them remain relevant. Snapchat bought Zenly to build their map product. Google bought DoubleClick to expand their offerings in the early days. Facebook bought Instagram to solve a mobile problem.

Why does someone buy you… specifically?

You get the big bucks when multiple want you – a bidding war is awesome! It’s not the most likely outcome, but you can wish.

Acquisitions don’t just happen. They are engineered. Most common is you start working with a company on an API integration, channel partnership etc and illustrate your value. They start thinking, hm, ‘I might like to own that?’ Then the question comes over the transom… “Alex, have you thought about selling?

You need to understand the pain points of potential acquirers. What are you doing that they will need? What is a gap in their product?

You will gain the most credibility if you know senior people at big organisations and have had encouraging off the record talks with them. Even better if they have insinuated they would quit to join you when you can afford them.

What you need to say

“Companies buy startups because they solve a problem for them. Clearly, Adobe would be a great example, so let’s discuss the logic of one example. We can get into this in more detail depending on the time we have.

We are building the simplest, easiest to use graphic design product designed specifically for web and mobile, not the desktop. Adobe’s creative suite is amazing, but it is really hard to use. We believe simplicity is the next phase of desktop publishing. Ease of use expands the market beyond creatives that have had training, to the mass market.

Adobe is not easy to use and building such a product does not fit their strategy and unit economics. Buying us would enable them to expand their product range, without the innovator’s dilemma. Furthermore, they expand into additional customer segments which will not impact their channel partners.

I know someone at Adobe and they have given me an off the record nod that they might be interested if we built a large enough user base.” 

Question: What is the geographic fit with potential acquirers?

What they mean

What country are you based in? What country are your potential acquirers in? Do they have a presence in your country?

If Salesforce just focuses on America, they aren’t going to buy you in Thailand. That is unless they buy you to expand into Thailand. More likely they want to leverage you to penetrate their own market more. Having said that, Groupon acquired someone in each market to expand globally.

At earlier stages, local buyers are more likely. There is a reason the Bay Area is a great place to start-up – there’s a depth of buyers. VCs need to know you have local buyers.

If you are in a region such as Asia, you have to be a regional play. Sure you start in your home market and leverage that as a base to expand outwards and that will take time. But conceivably, a regional play will be attractive to a certain kind of acquirer. Again, you are solving a problem a corporate has or an opportunity that they want to leverage so you need to be able to drill down to geography, especially if you are off the beaten track.

You also may need to relocate at a certain point. A number of companies have started in Europe and then relocated to the States. That may or may not make sense for you as a SaaS as opposed to an ecommerce company. Obviously, if you are in local ecommerce, moving to the US is a major focus shift. Availability of capital is actually a prime motivator.  

Where you might be pitching an investor who is not familiar with your market, say Nepal, (There are investors with a global perspective), they may genuinely want you to educate them so they can build comfort. Is there really a market in Nepal? Can you find the necessary talent to scale there?

What you need to say

“We are focused on our home market. We still have a lot to prove. There is a global problem though. At this point in time and for the next 2 years, we see local buyers. We are building a way to use payments in Thailand. The banks are plagued with legacy systems and we would be a very logical buy.

Once we expand across SEA we will have a broader footprint which would appeal to PayPal and the like. We wouldn’t be interesting to them till then, my friend at PayPal told us. PayPal have been expanding their offer in the region through Braintree and whilst a global company, does have a regional focus that we seek to fix. In around 4 years we would be a good fit for them.”

Question: Do you know your potential acquirers? Do they have a history of making acquisitions?

What they mean

We have dealt with similar questions like this before. In asking this question, the investor is not only asking who you think your potential acquirers are but do they actually buy startups? You will need to have some industry knowledge to be able to answer the question. I don’t know is a flag that you are new to the industry, so if you have been pretending like you know what you are talking about, this is a great way to be found out.

Do you know the market? Have you talked to competitors? Clearly, yes is a good answer. Would you rather invest in a founder who is a deep industry insider, or Johnny no mates?

Acquisitions are engineered; they don’t pop over the transom via email as we discussed previously. Relationships are helpful in this regard. Maybe you worked at some big companies, or you know a lot of people because you used to do business development?

Investors are testing your knowledge. Who has bought whom? If you say some banks are likely acquirers, but they have never acquired anyone, then you are talking BS. Why are they going to start buying now? Do you know?

Timing matters. If you say ‘Google’ and they just bought your direct competitor, why would they be in the market to buy you too, now? Doing acquisitions of direct competitors removes a potential acquirer. Though it also may elicit ‘me too’behavior as competitors think they need to have a competitive offering too.

A lot of acquisitions happening in your space is largely positive. Say you are in ‘AI’, you could say that there have already been 20 acquisitions this year as it’s a hot area and the big 3 are hoovering up talent. Deep Mind was an example of that. We have a great team so we are clearly attractive even just for an acquihire.

This question is an opportunity for you to establish credibility. If you’ve bee modest to date, then it’s time to pull out your big guns and do some good old-fashioned name and knowledge dropping.

What you need to say

You ideally need to have reached out to the buyers about a bus dev deal or to get some knowledge. Of course, this is not always possible, but it makes sense. It de-risks the deal a lot. You also need to do some basic research about their acquisition history to make anything you say sensible.

“We reached out to three of the mid-sized players in our space, but have only got to chat to one person at Zenefits. Mary the CMO does a lot of talks and was a panel with our CMO once. We’d love your help on this if you were to invest actually.

The top 5 guys on our buy list all have a history of buying. Zenefits bought x and Zenpayroll acquired y. They’ve all raised a lot of money recently, so imagine in future they will have dry powder to buy us now. We aren’t interested in $20m though as we see a far larger opportunity.”

Exit strategy questions for startup fundraising 3

Question: Are there many buyers for this?

What they mean

You set up your startup to solve a problem for a bigger company than you to get bought. It’s not really about solving a customer problem as we talked about in a prior session ;).

Implicitly here, there’s an element of skepticism though. Investors may have accepted the premise that someone would buy you, they just aren’t sure who they are and if there are many of them. More fundamentally, at the stage of your development, you may need to pitch your value more and communicate that you really are solving a large problem that is big enough for someone to want you.

Perhaps you haven’t gotten to a point in the meeting where you have communicated how you are going to expand into new verticals? You communicated you are focused, but perhaps on too small a niche. You might want to pause and say, ‘Jim, to be clear, we have a larger vision. We have only shared a little of it to show we are focused and not confuse you too much since this is our first meeting. So look, we start with the market for black care in San Fran, but we see the greater market as being the market for mobility. Once we reframe, I think it becomes clear that there is a larger market for acquirers.’

Investors want to make sure you believe there is a pool of potential buyers, otherwise, they may never get their money back. If there is only one potential acquirer and they buy a competitor, then suddenly the only option is to IPO, which doesn’t happen often (and is frankly a huge pain in the ass).

What you need to say

“Of course there are!

If we achieve our mission of making our customers delighted, then why wouldn’t someone want all these happy, paying customers!

We see three categories of buyers, banks, payment gateways and service companies. All in all, we have mapped 35 buyers in 4 different countries.

The driving factor is a combination of our mobile first stack as well as the mass of customers and their data we generate. Sure we are starting just with one value proposition due to developer resources, but in later stages we will achieve that fuller vision of a true full-stack.”

Question: What did they sell for? Who bought them?

What they mean

If you are asked a question like what someone got bought for and by whom, you are already knee deep into a discussion and have the investor engaged in you. But… if they are asking detailed questions like this, it means one of two things:

  1. Bad: Either they are still concerned that there are potential issues around acquirers
  2. Good: They are actually enjoying talking to you and learning

Do you know your industry? Are you an insider? Are you an expert? Hell, do you even read TechCrunch?

As I said, this is a follow-up question to a conversation you are having. If you haven’t established any credibility, then it’s an exam. Do you pass or not? Alternatively, you’re just having a conversation and the investor wants to learn from you. Investors love to learn… and pump you for all the information you have.

If you have insights into deals and non-public information you are credible. This isn’t going to get you an investment, but it’s establishing rapport and you as an expert.

I recommend knowing what goes on in your industry, who gets bought and what the deal terms are. The more important deal terms are exit value and the acquisition multiple of revenue, GMV etc.

The only word of caution here is that time is ticking. If you are in a first meeting then you need to steer the conversation back to the key things you need to communicate. I would answer briefly and then say ‘Jim, I would love to grab a beer and chat about deals if you are interested. But I’m conscious that time is ticking and I’d love to give you a demo of our platform before we need to run to our next meeting.’

What you need to say

“We know Bob in Corp Dev. He told us some things in confidence that we can’t share. What we can say is the founders were quite happy with the deal and so were the investors. Khaki Capital may have returned the fund on them, but I can’t comment. I’d love to chat more on this, but I’m conscious we only have 20 minutes left and I’d love to run you through our metrics and give you a demo of the most used features.”

Question: How much do you want to sell for?

What they mean

This question is not what you think it is. It’s not just a number. It carries a lot of baggage that you might not be aware of.

VC is a hit-based business. investors don’t make money from a $20m acquisition. Yes, $20 is a lot for most people, but that’s why investors and founders are at odds. Read this to understand more: “A meaningful startup exit strategy is not the same thing for venture capital.”

VCs don’t invest in a lifestyle business, they need you to be big, really big. So, they want to know, no need to know that you are ambitious and want to swing for the fences, so they and their LPs make a lot of money… if you don’t fail trying.

Most founders in my experience don’t know what their magic number is. That’s the number you want to sell for. It needs to be at least $100m and probably a multiple of that.

A simple rule of thumb is you need to earn them the size of their fund. So if they own 15% at exit and their fund is $50m, then your exit needs to be for $333m. If you’re pitching one of the top tier funds it will need to be larger to matter. Fancy having someone like Sequoia? Well, they have a $1bn funds. So you really need to be shooting for a $6.7bn exit depending on how much they own, which is more likely to be higher than the 15% I mentioned before since they will likely triple down if you are working.

Never ever tell a VC that you want to sell for a measly number like $50m. It’s not interesting to them. Understand this dynamic.

Angels are a bit different. If you exit early and aiming for a few million and you only raised a few hundred k, then that can be a fab exit for them. In general, I would always pitch a big exit from your big idea… in the monster market you have. It’s safer. Just don’t be delusional if you are running a sandwich stand unless you really think you are the next Subway.

What you need to say

You need to want to sell for a large amount! Selling for a billion is a very loaded answer though, so be careful.

“We love our mission to solve on demand carrots. But, we aren’t a charity and want to be rewarded for delivering orange happiness! Other companies in the space have sold for nearly a billion and others for hundreds of millions. We would happy to sell for $100/200m in 4 year’s time at a 2x GMV on the conservative side. A lot has to go right for us to be a unicorn, and I know it’s a cliché, but the market of carrots is big enough to support an exit for that in around 7 years. I think we would all be delighted if that was achieved together. Do you agree?”

Question: What can you sell this for?

What they mean

It feels like a bit like investors are saying ‘sell me this pen.’ They’re not, but they sort of are.

They’re just trying to figure out how much you want to sell the company for (i.e. how ambitious you are) and also add to their thinking about what and how an acquisition will happen, and from whom? So, it’s both a sneaky question and a logical one.

To get an A you will need to ground your answer in realities of your market size and exit multiples. What do I mean by this?

  • Market size: You can’t get big if you don’t have a large enough market as you won’t have enough people to pay you
  • Exit multiples: When you have revenue or profit, what we typically call EBITDA, companies are frequently and easily valued as a multiple of their revenue. You pick companies which are similar and traded on the public markets and divide their market cap by revenue and EBITDA. You then get the multiple they trade at. You then multiply that multiple against your figures. You can also do this with transactions that have happened in the private market. The problem is you may not know them. Investment banks track these numbers

If your competitors trade at 10x in a bear market, then you have that going for you. You could say that the market for carrots is $10bn and you could access $200m of that in revenue. So at a 10x you’re a $2bn company. If you have a market size of $200m then you are not going to be able to get to $200m in revenue.

Now I’m going to teach you something else about how deals get done. They can be done either in cash or shares. Cash is simple, they buy you and that money goes in your pocket. Now they can also buy you in shares which means you will own a share of their company. Investors may not like this though. You can be paid in a combination of both too, but this is likely only going to happen for very large deals. For small ones, they will just give you cash.

Whyt does this matter? Well, people need to have the dough to buy you, right? If you are worth a billion then someone needs a billion. So your answer can include that the companies you are thinking of would be able to buy you in both cash and shares, assuming they are large enough.

To wrap up, once you have shown you know multiples and valuation, you want to add who has the cash or shares to buy you. You finally share a couple of names and then some comments on why that would make sense, like ‘they don’t have a mobile strategy.‘ Make sense?

What you need to say

“I guess when is important here. In the next 2 years, if we hit our milestones, x and y would be interested in order to build out their product. We see a multiple of 8x reasonable. So, if we are doing $15m run rate ARR that’s $100m. A fair number of people would be able to afford that.

Obviously, in 7 year’s time, that’s different. We could be doing in the range of $50-80m which is grounds for a financial acquisition, so I think that math works well. Depending if we achieve our mission, we would be a fab strategic purchase. I love carrots, so would be happy to do an IPO if we need to create a liquidity event. A and B would be prime acquirers since they both started and shut down their initiatives in carrots.

Facebook, Google and Apple have $350bn with a B in dry powder offshore. Locally, and x have $500m on their balance sheet. For a couple hundred million exit, we think that’s quite reasonable to cover in a cash deal. They, of course, can issue us stock too.

This is for a large exit scenario. Your RoI is time-dependent. So a couple hundred million exit in a shorter time period will sate everyone.

Question: What would the exit multiple be?

What they mean

You are unlikely going to be asked this question. I’ve included it to help ensure you understand what it means.

If you were, then this would be a test to see if you understand your business model and industry and whether you have allocated any time to think about the exit. It could also just be the investor asking a random question because they are thinking about it.

In the last question, I taught you the basics of multiples. So now use that knowledge. You need to check previous acquisition multiples in the private market and what companies have been trading at on the public market in your industry. Check them before you meet investors. Ok, I know this seems like a pain in the ass, but it’s very useful to have an idea for what you could be worth depending on your revenue forecasts.

For private multiples, read deal announcements (You will probably have to make assumptions to get to ballpark) or call up one of your investors/friends.

For public multiples, depending on your industry VCs and brokers will blog occasionally to save you some time. If you are in SaaS, check out Bessemer here. If you have a friend in banking, ask them for a ‘broker report.’ Or, just go to Yahoo! Finance (the only good thing they ever did) and check the trading multiples one by one.

Get an average and there you go. You just apply the multiple to your forecasts to get an idea for what you could be worth.

What you need to say

“Five companies were bought in the past 3 years between 3x and 7x. The 7x was for Salesforce which sells different things to us. Zendesk was 6x which is more similar to us. Groupon is trading at 10x which is obviously higher given the liquidity premium.

It will obviously depend on the industry valuation at that point in time and how strategic potential acquirers view us as being. The SaaS market is currently at 7x which is at a down cycle and historically gets near 10x on average. Clearly, the rate of our growth will impact where we are on that scale, as well as what stage of the industry cycle we are.”

Question: If you want to sell for a billion or more, as you say, why will someone pay that?

What they mean

You told them you want to sell for a billion, didn’t you? Hm, ok!

You better have a good answer. A billion is a lot. You may read about the 50 or so unicorns, but they’re still fricking rare! Of course, investors are unicorn hunting but they also have some inkling as to how really hard it is to build a company that large. So many things need to go right.

The bigger you are, the fewer potential buyers there are. So, to be acquired you will likely have to be strategic, like say Instagram and WhatsApp were for Facebook. What core problem and trend are you a part of selling in?

If you are making big money, then an IPO may be a real opportunity. You don’t need to be a strategic acquisition, you just need to have interesting financials.

Your answer can be that you would get bought most likely for a strategic reason, but the public markets would pay for a great company. Whilst IPOs are rare, they still are an opportunity.

The most critical determinant of unicorn possibility is by targeting a really large market. I keep saying this because it is really very important. You need to get that across to investors.

What you need to say

Well since we’re SaaS I presume you use Bessemer’s comps for the public markets? We aren’t investors so unfortunately, we don’t get access to the private transaction numbers… like I presume you do. Private comps are 0.rarely shared.

Public markets are trading around 5 presently. So with a liquidity discount of 1.3 according to SaaS capital, a general private startup is trading at 3.5x. Now, that always ‘depends.’ We used the 50Folds valuation calculator (Note: coming soon!) and given our growth rates, payback and market size we are valued at 7x, mainly due to our growth rate. So as a private company we would need to be making about $130m to get our billion dollar valuation.

However, being acquired is not the only option. We can be a public company by going IPO. In the public markets we believe our multiple would be about 10x again, due to growth. On that basis, our revenue would have to be $100m. Fortunately, the SaaS market for mobile is incredibly large pegged by Forrester at $76 billion. There’s enough for us to take a small slice and still be respectably huge. On a bottom-up basis, we would need 1000 clients at an average ARPU of $100k.

Now dealing with the strategic side, mobile matters. The big guys like Facebook still don’t have their strategy and product right. We are experts at mobile. John founded Instagram and Mary was Head of Mobile at Google. We have our strategy to stick to and if our thesis is right, there are 7 companies who will fight for us as there are very few other buyers. You get a big price with scarcity and a bidding situation.

Either way, I’m confident we have a snow balls chance in hell of getting there if we execute right.” 

Question: Do you want to IPO?

What they mean

IPOs used to be all the rage in the 2000s. A path to easy money. That got old fast. In the past decade, IPOs have lost a lot of interest from the perspective of founders. Companies are staying longer a whole lot longer. Anyway, that’s academic. IPOs are a way for founders and investors to cash out.

The thing is, running a public company is a massive pain in the bum. I mean truly! You think it’s all fame and awesome, but it’s not. You have quarterly reporting, you need to have a CFO write annual reports, big audits, more cost overhead, the list goes on.

When an investor asks this, they’re testing to see if you actually understand what an IPO is and means, and how open you are to exit options. IPOs suck as I said, but they’re another means for investors to get their money back.

Your answer should always be ‘we are open to it.’ Never no. Don’t be closed to exit opportunities. Investors want optionality. If you want to say no, don’t. Say an IPO does come with challenges, costs as well as distractions, but you’ll be open to evaluating your options should the opportunity arise.

What you need to say

“IPO has its advantages and considerations. We see great opportunity in using shares as acquisition currency to build out our product offering.

We are worried of course that quarterly reporting could impact our long-term flexibility to be more innovative.

We’ve seen the inability of GrubHub to adapt to new entrants. Having said that Google has handled it really well with their dual-class share structure with super-voting rights.

All in all. When the time is right, it might make sense. Let’s build an amazing product first. I’d welcome your council when the time arises.”

Question: Do you want to sell this?

What they mean

Investors need to exit, you need to too. If you aren’t starting up to sell out, this isn’t going to work and you should not take any investment. VCs need a big exit so they’re wondering what your plan is and if this aligns with their needs.

Don’t yell ‘yehaw, bitches!’ There’s this weird culture that founders are meant to be missionary not mercenary. It’s meaexit strategy for investorsnt to be a baby you would never want to give away, but you need to when it becomes a teenager or grumpy old man.

It’s fine to be all about the $, but don’t say that. Be measured and moderate.

What you need to say

“We’re raising money and want to buy an island at some point… Of course, we do!

We know how VCs work, so we wouldn’t be here if we didn’t have an exit strategy.

Having said that, building something incredible takes a long time and we’re nerds, we like to ship code. We’re good for this for about ten years then would likely want to play with a new idea and technologies.

Why don’t we discuss our exit plan and we would love your views on it.”

Question: When do you want to sell this?

What they mean

Do you want to sell this’ as we dealt with previously is unlikely to be asked unless you have given off some weird vibes. When is a better question.

It takes a long time to build a big business. Investors need you to be committed for around 10 years. 7 to build your startup into something large and then another 3.

Another 3? If you do a trade sale, the acquirer is buying the team in most cases. They will likely structure the deal so that you do not get all your payout. You will effectively vest your earn-out like you did your shares in the early days. Investors, of course, will be able to cash out immediately, but you won’t. Yeah, tough. There are ways to manage it, but that’s not the point of discussion right now. 

Back to making big business. If you sell your company next year, then you are not value maximising in most cases since you are leaving opportunity to grow on the table. The return investors will not be big enough. They’re asking how committed you are for the long-term.

The answer, of course, is the long-run. Whatever it takes to maximise value.

Execution is everything, ideas are not worth anything- try selling one. Every investor needs to know when and how they will get their investment back and then some.

The great thing about this question is investors will only ask it if they are getting interested.

The easy thing to do would be to answer this question literally and tell them your timeline and how much you want to sell for, but this is a great opportunity to also sell yourself.

Remember you are in the sales meeting, so sell the strength of your team, your key achievements and traction, the problem in the market that you’re solving and how you’re solving it, and finally how massive the market is.

What you need to say

“We quit our jobs to build cool stuff. We love building, but there’s always a price, right? If someone offers $50m tomorrow we would be crazy to not take it given what we have done so far! But that’s not going to happen.

Assuming that it makes sense for us to go ahead with this partnership, it’s important for us to be aligned with the kind of company we want to build.

Our downside aspirations are to build $100 million company. Mary and I have both exited companies before for low digit millions. We have bought our house and the kids will be okay. We’re doing this to swing for the fences.

If a lot of things go right then we would love to build unicorn, obviously, that is a cliché but we see the opportunity in the size of the market. This will mean that we need to raise another four or so rounds of capital; there’s no way around doing so given the payback period on our acquisition costs.

You need to buy into that plan. I would love to know if you have the dry powder to do follow-on rounds?

Also, it takes a long time to build a massive business, so the team is aligned and committed that the biggest exit will be in around 7 years, which is what it historically took to get to IPO. You can’t time an exit, but when we create compelling value the big boys will come knocking. I presume this timeline fits into where you are and your current fund life?

Question: What price would you sell this for now?

What they mean

Like the last question “When do you want to sell this?” investors are seeing how committed you are.

That’s a lie, well a half lie… They are also getting an idea for your valuation expectations for this round and how ballsy you are. They want you to want to make money so that they do too.

If you would sell for $5m and you are asking for a $20m pre-money are you really worth that?

If you’re raising $5m, then basic VC math states your raising on around a $20m pre. If you would sell this for $50m now then the VC books a 2.5x return with no work. 

For some VCs, $10m might be a nice return in a short period oif time, but for most VCs that simply doesn’t move the needle. The safest answer is to crack a joke and then be serious and say you don’t plan on selling for many years and are motivated to solve your mission to make parking easier… Erm.

What you need to say

“Everyone has a price, they’re lying or naive if they say that they don’t. $50m would be a big deal for a year’s work. We wouldn’t sell for less than $30m since what would we do after? We would just set up another company. We see so much potential here and the timing is perfect with the trend in digital signing. We really see a pop coming in 2 years so we are timing ourselves before the curve. It wouldn’t make sense to leave so much money on the table now. But of course, there’s no harm in listening.”

Question: Has anyone approached to buy you?

What they mean

You love it when you are out on a date and everyone is looking at your date. It makes her look popular and that you made a good choice. It’s social proof. Investors love it too.

Do you think it is a positive sign to investors if people have already ‘hit on you’? Boo yeah! That may not mean anything in terms of real purchasing intent, but it’s a really great sign.

If people have already approached to buy you, then they will likely be interested in the future when you have an even more compelling value proposition. So, if the investor gives you money to grow and become more valuable, then it is an easy win for the investors. Downside they might just get their money back which derisks the deal, they just lose on the opportunity cost of capital

It’s is f****** sexy to say you have had people already say that they are interested in you. Another positive sign is that you are only going to have interest if you have a network of that you are getting known in the industry.

What you need to say

“Our product has only been on the market for six months, for now, we are too small for the potential acquirers that I have in mind but I had one fintech company indicate he would be interested in an acquihire.

But Susan to be clear, I didn’t quit my job at IBM to sell this for a couple of million dollars.

Having said that I was talking to Sunil at PayPal and they are having problems with their subscription payments. He was interested in having us talk to their business development team to see about an integration. Sorry, Sunil, is head of mobile.

As you know deals don’t just happen, they happen through relationships. I’m confident that if all goes to plan that PayPal would be a logical buyer for us and I already have some relationships there.”

Question: What will my return be?

What they mean

Like many of the questions we have dealt with, investors need to make money to give back to their limited partners. It’s not really the founder’s job to do the return maths for investors and I think it is not fair to ask. The people who will ask are more likely to be ex-bankers.  They think everyone understands the boring things they do (Yeah, I was a banker).

Ultimately, what investors are really getting at is how big of an exit are you looking to for. Furthermore, they may be trying to understand if you understand the venture capital business.

A good answer would not simply just state a number, but show the logic of how you get to a range of numbers. I always prefer a range of numbers than picking a specific number. Ranges are far more credible. Specifics are specious at best.

If you want to get an A here you need to understand how VC math works.

VCs have this concept called a targeted ownership percentage. They can only take so many bets and very few will make it big so the ones that they do win on, they need to own enough to make the investment compensate for the ones that don’t work, and then some.

Next follow-ons impact the ownership percentage. Smaller VCs can’t follow on in their investment, meaning they can’t invest in future rounds. In this case, they will likely exit (depending on how many rounds get done) with 10-15%. So if you sell for a bill, they are getting $100-150m. Larger VCs are more likely to keep betting on you so will own something more like 20-30%. So for a bill you are talking $200-300m- again this depends on how much they put in and how heavy they were.

Finally, you have your exit value. You sell for a bill. That’s the end of that.

You times the exit by the ownership percentage and you know what cash they are getting.

Cash on cash is a term VCs use to communicate with their investors. That’s simply how much cash they got divided by the amount they invested. If you want… you can always do an IRR calculation and tell an investor what their cash on cash and IRR might be under certain scenarios, but that’s a bit overkill when you really have no idea what the future looks like.

Yes, of course, this can get a lot more complicated with liquidation preferences if you don’t knock it out of the park, but that’s the basics you need to know now.

What you need to say

“That depends on when we sell the company, as well as a number of other factors such as the exit multiple if we are in a competitive situation, as well as to a lesser extent how much money we raise.

To maximize the value of this venture we are looking to either do a large trade sale to one of the large companies or do an IPO. That will more than likely take us 6 to 7 years.

Under our business plan, we could be doing in the range of about hundred million run rate. Assuming private exit multiples in the range of 6 to 10 we are talking $600-$1 billion.

Typically, enterprise size companies raise around $70 million to get to this position and since we are talking series A of $7 million that would imply another four rounds of investment where you would be diluted too. We are looking to do our round at around $20 million pre-money. I’m sure that you can do the math to figure out your ownership percentage depending how much you follow on, but these are our expectations and our plan.”

Exit strategy questions for startup fundraising 2

Question: What is your exit strategy?

What they mean

No joke, pause and answer this question: what is your exit strategy?

Stuck? Yeah, this is not a simple question. I ask founders all the time ‘how much do you want to sell for’ and it’s incredible that founders have literally no idea. I am not joking. I bet you don’t either, do you ;)?

If you don’t even know what you want to sell for, how can you have a plan for it?

This question is similar to other questions but it is a lot broader, giving you the opportunity to provide a structured answer and show how logical you are… hopefully!

You want to touch on timing, how you are going to grow your company, develop relationships with potential acquirers etc. Ultimately, this comes down to value maximisation so everyone makes out like bandits.

You might mention that multiples in the public market are better so an IPO could deliver the best return. Perhaps, you are a better strategic sale and ergo that is the best option?

Clearly the longer you grow the more valuable you should become. So do you plan on selling in 4 years or 7? Everyone is going to be different, so there is no simple answer. Tell your story.

But here are a few ways you can exit.

What are your options to exit:

  1. Shut down= fail (Screw that)
  2. Acquirehire – (acquisition + hiring) You get hired for your team and for not much more. This happens in the Valley, not really anywhere else. This is an honourable exit. Most of the time the ‘deal terms will not be disclosed’ as it’s screw all value. The investors are probably wiped out
  3. Trade sale – You get bought by a competitor. Salesforce buys you etc
  4. IPO – You exit on the public market

Obviously, trade sales and IPO are what you are gunning for. So when is it going to happen, why and for how much?

What you need to say

“Acquirers will only buy a company that is solving a problem for them over the longer-term. Our focus now is not on exiting but solving a real problem for customers. If we can make the customers really happy then potential acquirers will follow.

A trade sale and IPO are both potential options over the longer-term. Of course, if someone was to come along and make a crazy offer in the next few years we would consider it, we would be crazy not to, right?

So, our plan is

1/ build a product that customers love and gets us brilliant traction,

2/ develop a marketplace which will create barriers to entry,

3/ develop partnerships creating a track record or relationship with them.

If we are able to disrupt the market we will get offers to exit. We focus on being awesome.”

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exit strategy for investors

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  2. THANK YOU for putting out info that actually helps! Finally there is a credible resource that seemingly is only looking to educate other crazy bastards like us who are Founders.

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