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.

Download the exit strategy for investors questions and get updates on new Q&A

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. 

No back to VCs though. 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 whick 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 aboout 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 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 over time. 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.

What you need to say

Do some homework. Have at least 5 potential buyers or 3 categories of them (This can be smarter since you can mention a few companies per category and let investors think for 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 if 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 WPP may make a lot of sense. 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 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

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 just bought Zenly to build their map product. Google bought DoubleClick. Facebook bought Instagram. 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?

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 more time depending.

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.” 

Question: What is the geographic fit with potential acquirers?

What they mean

If Salesforce just focuses on America, they aren’t going to buy you in Thailand. That is unless they buy you to expand to 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 SF 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?

Where you might be pitching an investor who is not familiar with your market (There are investors with a global perspective), they may genuinely want you to educate them so they can build comfort.

What you need to say

“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.”

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

What they mean

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.

They are also testing your knowledge. 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? Also, if you say ‘Google’ and they just bought your direct competitor, why would they be in the market to buy you too?

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 ol’ fashioned name 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 their 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.”

Exit strategy questions for startup fundraising 3

Question: Are there many buyers for this?

What they mean

They’re testing you to see how much you know. There’s also an element of scepticism. You may need to pitch your value more. They want to make sure you believe there is a pool of potential buyers, otherwise, they may never get their money back. You set up your startup to solve a problem for a bigger company than you to buy. It’s not really about solving a customer problem ;).

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.”

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

What they mean

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

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 e.g. revenue, GMV etc.

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 firm, but I can’t comment”

Question: How much do you want to sell for?

What they mean

VC is a hit based business. They don’t make money from a $20m acquisition. Read this to understand more.

VCs don’t invest in a lifestyle business, they need you to be big, really big. So, they want to know, no know need to, 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 large to matter. Understand this dynamic.

What you need to say

You need to want to sell for a large amount! Selling 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 they’re 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 (how ambitious) 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 the market size and exit multiples. 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. Then you want to add who has the cash to buy you? You could also mention they could do a share deal if they didn’t have all the cash.

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.

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 purcase. I love carrots, so would be happy to do an IPO if we need to create a liquidity event”

Question: What is the exit multiple?

What they mean

This is a test to see if you understand your business model and industry and whether you have allocated any time to thinking about the exit.

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.

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 friend in banking, as 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.

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”

Question: How are comparable businesses valued; both on the stock markets and in M&A transactions?

What they mean

This is the same question as ‘what is the exit multiple.’ Let’s be honest, you are unlikely to be asked this. I’ve never been asked, nor asked something like this.

I’ve only included it here to broaden your horizons. This is something you should be thinking about and have some sort of awareness of.

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 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 50Folds valuation calculator (Note: coming soon!) and given our growth rates, payback and market size we are valued at 7x.”

Question: What acquisitions have there been recently?

What they mean

This is the kind of thing you get asked in banking. Most investors will not ask you this, tbh. Just know what is going on in the industry.

I would answer this briefly and then turn it into a question.

What you need to say

“There have been exits in two key trends: payroll and payments. In payroll, Zendesk sold to Facebook and in payments Gusto sold to Bigpanda. We think the Gusto sale was really interesting because of how they leveraged data.

How do you think data is factoring into acquisitions presently?”

exit strategy for investors

Question: Are you a strategic purchase?

What they mean

No, we’re not… said no one ever!

They want to get to get to you think if what you are doing is valuable to someone else? How are you different and special? Why specifically would someone buy you? What problem do you solve for a buyer, not the customer?

An honest answer might be ‘not right now, but we plan to. Let me tell you how.’

What you need to say

The UK is a massive market. This is our home and our focus for the next 2 years. We will, of course, expand to Germany and France, where we see the need, but this is our home market.

We know Salesforce will need a bigger play here to perpetuate their growth story. We know the market very well. Once we have built out our core integrations and supply side of the marketplace, we will be a very compelling platform upon which they could enter the market.

I believe that would be strategic to them.”

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!

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

Internalise there are fewer sellers the bigger you are. So, do you plan on doing an IPO instead?

What you need to say

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.” 

Question: Do your potential acquirers have the cash to buy you?

What they mean

They either don’t believe you when you say who you think the buyers are, or they don’t know the market of France as they don’t normally invest there. So, they are genuinely interested in learning, or they are testing you to call your bluff.

This is less of an interest question than it is calling BS.

What you need to say

“Facebook, Google and Apple have $350bn with a B in dry powder offshore. Locally Priceminster 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 a couple hundred million exit in a shorter time period will sate everyone.”

Question: Do you want to IPO?

What they mean

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, 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 IPO come with challenges and costs as well as distractions. You’ll be open should the opportunity arise.

What you need to sayexit strategy for investors

“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.”

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. But 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 meant to be a baby you would never want to give away.

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.

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’ is unlikely to be asked. When is a better question.

It takes a time to build a big business. They need you to be committed for around 10 years (7 to build something big and another 3 depending on the handcuffs put on you).

If you sell next year then you are not value maximising. The return they get 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.

What you need to say

There’s always a price. If someone offers $50m tomorrow we would be crazy to not take it right! But that’s not going to happen. 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. When we should sell is something we would take advice from the Board.”

Question: What price would you sell this for now?

What they mean

Like the above question “When do you want to sell this?” they’re seeing how committed you are. that’s a lie… They are 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’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.

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 in 2 years. It wouldn’t make sense to leave so much money on the table now. But of course, there’s no harm in listening.”

Question: Do you know your competitors?

What they mean

This is very similar to a lot of the other questions. On the face of things, they are asking whether or not you truly know your industry very well, or not. More deeply the trying to understand how smart you are. Since acquisitions don’t just happen they need to be engineered and that comes through relationships. To investors, the best founders to invest in our industry insiders and will be able to get deals done.

What you need to say

“Well as you know Frank, I’ve been in this industry 15 years and worked at some of the blue-chip companies. In fact, two of our main competitors were setup by my former colleagues, and we see each other at the usual fintech events on panels. It would be safe to say that I know something about the industry.”

Question: Has anyone approached to buy you?

What they mean

Investors are just trying to get an understanding of whether there is an interest in you and the market already. Obviously, if people have already approached to buy you, then they will likely be interested in the future. So, if the investor gives you money to grow and become more valuable, then it is an easy win for the investors.

It’s is f****** sexy to say yes.

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 Susan, 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, 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 so what they are really getting at is how big of an exit are you looking to do, 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.

You aren’t like to be asked this question. I more writing it down now so that you think about it.

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 but these are our expectations and our plan.”

Exit strategy questions for startup fundraising 2

Question: What is your exit strategy?

What they mean

This is again 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.

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.

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? Tell your story.

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.”

Question: When are you paying me back?

What they mean

This is the same question as when do you want to sell this?

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

“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?

To build a large company takes time and we see that as being at least 5 to 7 years, I presume that fits into where you are and your current fund life?

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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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