The Venture Capitalist Pitch Deck: Your Exit Strategy
Exit strategy is a controversial topic, but you must include it in your pitch deck. Many people in the start-up world insist that you cannot build a good company if you are constantly trying to find a way out of it.
But venture capitalists (VCs) are interested in giving you their money for a short amount of time, five to seven years, and they’re obligated to return money to their limited partners in usually no more than ten years after the fund is established.
Because their primary goal is to get their money back and their secondary goal is to get their money back tenfold, they want to hear that you are already thinking about how to return their investment (and then some!) to them.
Look at your options
At the very least, acknowledge that the VC wants a return on investment and that you are working to meet that goal. You can increase your credibility by mentioning details about how you can do so.
You can provide many kinds of exits for your investors.
IPOs: Back in the late 1990s, the IPO was the popular way to cash out of venture investments. IPOs are few and far between today.
Mergers and acquisitions (M&As): Most exits these days involve larger companies acquiring a start-up company to gain a strategic advantage. Big companies often use acquisitions as their R&D departments, and your payoff comes from solving their big problems.
Royalties and revenue sharing: Some companies are not good targets for either M&A or IPOs but they still have venture potential. These companies can return multiples of VC investment through royalties or revenue sharing. Many oil and gas or movie deals are structured this way.
Build a case for a potential exit
Follow one of the Seven Habits of Highly Successful People: “Begin with the end in mind.” If you are developing a company for acquisition from the very beginning, you are much more likely to have a desirable company at the end.
To build a case of a potential exit, follow these steps:
Identify three companies that may be interested in purchasing your company in the future.
Indicate why they would buy you out in three years, and be sure you have a very good reason. Remember, M&As don’t happen unless the purchasing company has a solid reason for the purchase.
Find recent M&A history for those three companies.
Be able to answer these questions: In the last three years, have any of these companies acquired other companies? If so, how much did they pay for the acquisition and what kinds of companies did they buy?
Find data on three companies like yours that were purchased in the last three years.
Look for this information: How much the companies sold for, the stage they were in when they were acquired, whether early investors from those companies saw a good ROI, and the typical multiples that were paid by acquiring companies — for example, 2X (“2 times”) revenues or 10X EBITDA (earnings before interest taxes, depreciation, and amortization).