A lot of pitch decks I review have a slide that really shouldn’t be there: the exit strategy slide. Your slide deck should only have an exit strategy slide if you’re running a very late-stage company that’s about to IPO, and even then, you probably wouldn’t have it as a slide on a funding deck but as a whole, separate IPO plan. As an early-stage startup, it’s downright nonsensical, and it shouldn’t be part of your pitch deck at all.
To a lot of founders, an exit — or a “liquidity event,” as the legal buffs tend to refer to it — is the big pot of gold at the end of a very long and arduous journey. The same goes for investors; when there’s an acquisition or a public listing, that’s how everyone gets paid. Moreover, some of the old pitch deck templates that are floating around on the internet have an exit strategy slide on them, so it makes sense that people are still making this mistake.
TechCrunch+ is having an Independence Day sale! Save 50% on an annual subscription here. (More on TechCrunch+ here if you need it!)
Two things are true: One is that the best companies are bought, not sold. It’s unlikely that you know in advance exactly who will be interested in buying your company. Second, your job as a founder is to build the best company you possibly can.
Making decisions early on to help shape the company into something someone might want to buy simply doesn’t make sense; it makes you blind to some of the other options and opportunities that might present themselves.
Unless you’ve had a ton of exits with previous companies, the truth is that you probably have a very limited view into how this process actually works and how liquidity events come to pass. You know who has been through quite a few of those, though? Experienced investors. Using your precious pitching time to explain to your investors something in which they have more expertise and better market insight than you do is a waste of your time.
A better place to focus your attention is your competition slide. If you do have thoughts about who a potential acquirer might be, it might make sense to include them here. Is there an incumbent or a large competitor who can’t beat you, so they might have to invite you to join them?
The other thing to keep in mind is that if you try to predict how an exit is going to play out, you’re extremely likely to be wrong. Hilariously, I’ve seen startups try to predict who might buy them, and they ended up being right but for completely wrong reasons, which made the startups make some really daft mistakes in the early product decisions they made.
If you do include an exit slide, the best-case scenario is that you’ll have thought of all the same things as your investors have. In that case — pat on the back, well done. Except you haven’t really moved the conversation forward. Worst of all, this rarely happens. Instead, what I see from time to time are startups that introduce exit scenarios that don’t really make sense to your would-be investor. They’ll either challenge you on them (which is a waste of precious time) or they’ll make a mental note that you don’t know your market and be less likely to invest as a result.
In a nutshell, the truth is that you just don’t know. At the earliest stages of a company, your exit is likely to be a decade away. In that decade, you’ll learn more about the competitive landscape, your customers and the market dynamics than you’ll ever imagine today.
The final point worth considering is the way that venture capital works in the first place. Especially with inexperienced founders, VCs often lose money when a company exits too early. Selling for $10 million might sound awesome to a founder, but a VC is looking for a startup that might potentially return an entire fund. If they invest $5 million for 20% of the company, they’ll want the option to get a $50 million return. Which, if they still own 20% of the company at that point (unlikely, given dilution and later rounds, but let’s keep it simple), means that the company needs to sell for at least $250 million to turn that $5 million investment into a fund-returning exit.
Put simply, investors don’t want to hear that you’re thinking about exits at the earliest stages of your startup — it suggests that you might be willing to accept a small return or exit early. Put it out of your mind; it’s not part of the conversation at this stage.
Removing the exit slide from your deck means that at least you’re not the person who brings it up. But what do you do when an investor asks? There’s only one correct answer: “I am building this company to eventually IPO. If reasonable acquisition offers come in, I’ll take them to my board for discussion.” That does two things: One, you show that you understand that this isn’t just about your bank balance, but that there are a lot of stakeholders involved with an exit. Two, it shows that you’re open to having a dialogue with your investors about a potential liquidity event, so they can at least speak their piece when the time comes.
Comment