The way to exit from startup investment are called exit strategies. Exit strategies are actions by entrepreneurs, traders, investors, or venture capitalists to liquidate their stake in a financial asset when certain conditions are met. An investor’s exit strategy outlines how they intend to unwind their stake.
What is the way to exit from startup investment?
Investors, including venture capital firms and angel investors, employ a business exit strategy to cash out their investments. It gives them a chance to reduce or liquidate their investment in a company and benefit significantly if the company is profitable.
Additionally, it aids in limiting losses in the event that the firm is unsuccessful. Initial public offerings (IPO), strategic acquisitions, and management buyouts are popular exit methods (MBO). The exit plan would be determined by several variables, each with pros and cons.
What are examples of exit strategies?
There are various strategies used for exiting the business. Some of the common exit strategies are:
Acquisitions and Mergers (M&A)
M&A is one of the most popular exit strategies for firms that have received venture capital or angel investor funding. A startup is purchased or merged into a more established peer or rival in an M&A. It frequently occurs and might take the shape of substantial corporate buyouts, as was the case when Walmart paid USD 16 billion to acquire a 77% interest in Flipkart.
Smaller organizations can also boost efficiency by acquiring comparable companies to their portfolio. Smaller businesses would prefer to carry out M&A activities through marketplaces like SMERGERS since they would offer shareholders speedier liquidity at a lower price than conventional M&A channels.
In the first half of 2020, there were 6,948 agreements worldwide. These transactions total USD 901 billion in value. With a share of 17.1%, the financial services industry stood out as one of the best performers throughout this time. Six of the largest money transfers in the market were related to investing or banking, including Franklin Resources’ USD 5.4 billion offer for Legg Mason and USD 13 billion bids from Morgan Stanley and Kuwait Finance House, respectively, and USD 9.8 billion for Ahli United Bank and ETrade Financial, respectively.
The value of M&A agreements in India is anticipated to have been USD 38.1 billion in the first half of 2020. This strategy is also widely used in India. India participated in most of the deal-making, mostly in the power and energy sector, which had a market share of 22.7% and was worth USD 8.6 billion. With 15.5% and 14.65% market shares, respectively, telecommunications and financial services came in second and third.
initial offering to the public (IPO)
An initial public offering (IPO) is the method of openly selling new shares of a private company to the public. A business can raise funds from the general public by issuing public shares. Due to the enormous payouts and prestige attached to an IPO, it is sometimes regarded as one of the most prestigious departure strategies. A public offering is an unusual type of exit that takes a lot of effort and time.
A public offering may not be practical for most firms because of the high liability issues, shareholder demands, and expensive costs. 445 IPOS raised a total of USD 95 billion worldwide in the 2020 third quarter. India has a 1.4% market share and was ranked ninth globally in 2020 in terms of the total number of initial public offerings and tenth in terms of cash raised. In India, eight businesses issued initial public offerings in the third quarter of 2020.
The IPOs during these 3 months were thought to have been valued at USD 850 million. The most active industries were real estate, hospitality, and construction, which saw the debut of two initial public offerings. The IPO by Mindspace Business Park REIT, which had an issue size of USD 602 million, was one of the largest ones during this time.
Buyout by management (MBO)
In an MBO, the company’s management buys the assets and business operations they oversee. Large organizations wishing to sell specific sections that are not a part of their core business or privately held enterprises whose founders want to retire like this type of exit plan. A corporation can become private through an MBO to improve profitability and streamline operations.
These buyouts are frequently made possible with private equity companies or through leveraged buyouts, in which the management borrows substantial money to buy the company.
However, Capital First is one of the most well-known instances of a management takeover in India. Management buyouts are uncommon in India. The NBFC’s MD, Future Capital, took control of the business in 2012 and changed the company’s name to Capital First after receiving USD 159 million in equity financing from Warburg Pincus. Since then, the business has combined with IDFC Bank to create IDFC.
First, the first management buyout to be transformed into a bank. When Michael Dell, the creator of Dell, spent USD 25 billion as part of an MBO to take the firm private and exercise more control over its direction, that is one of the best examples of a management buyout.
Frequently Asked Questions (FAQs) :
What are the ways a startup can exit from the business?
Private offerings or secondary sales, assets liquidation or cash cows are some of the alternative exit strategies used by startups.
Why have an exit strategy?
Entrepreneurs frequently employ exit plans to sell the business they established. Because the choice of exit plan significantly affects business development decisions, entrepreneurs often design an exit strategy before starting a business.
Why are startup exits important?
Personal health issues or a family crisis, An economic recession, Unexpected offers, or A clearly defined goal can be some of the common reasons for exiting.
Do startups need an exit strategy?
Yes, it is important to be prepared for exit strategies for startups in cases things get out of hand.
What is an emergency exit called?
Early exit or emergency exits are used for startups to exit the business in stages of confusion or other crisis.
Conclusion
Venture capitalists rely on exit strategies for their startup investments, which carry a high risk but also have a chance to generate big returns. The optimum exit strategy would rely on a number of variables, including the sort of firm and its size. The exit’s goal would be crucial while deciding on the best course of action. Each party’s interests must also be considered when choosing an exit strategy when there are several shareholders.
There are many different types of exit strategies, but it is crucial to have one in place to maximize investment and guarantee profitability. Venture capitalists rely on exit strategies for their startup investments, which carry a high risk but also have a chance to generate big returns. The optimum exit strategy would rely on a number of variables, including the sort of firm and its size. The exit’s goal would be crucial while deciding on the best course of action.
Each party’s interests must also be considered when choosing an exit strategy when there are several shareholders. There are many different types of exit strategies, but it is crucial to have one in place to maximize investment and guarantee profitability.