Many startup founders do not really think about building an exit strategy. Also, when you’re going about raising venture capital, talking about an exit strategy is kind of like a double-edged sword. On one hand, they want you to say and think about how you’re going as big as possible into the moon. On the other hand, every investor wants to know how they’re going to make their money back. Regardless, having an exit strategy and developing an exit edge is extremely valuable. So in this blog, we will walk you through what it is, why you need one, and how to actually go about building one.

What is an Exit Strategy?

An exit strategy gives founders, investors, and stock option holders a way to reduce or eliminate their stake, hopefully for a profit. An exit strategy is basically a strategic document—maybe a one-pager, maybe longer—that helps you think about how you can possibly sell the stock in your company either partially or holistically so you can get some liquidity.

Why You Need an Exit Strategy

Now that we know what it is, let’s talk about why you actually need one. There are three big reasons why you need one, and we will go through them one at a time for you.

1. Clarity for Yourself

Why are you building the business? This is actually probably the biggest reason why you need to think about an exit strategy because there are some entrepreneurs that are misaligned with their start. Founders are building a profitable business, and for them, they just want it to live on forever. Maybe it’s passive income, and maybe it’s profitable, but they want to slowly build it out and always reap from the profits. In a scenario like that, you don’t really need to build out a giant exit strategy, right? Because you’re not planning on selling the business.

Even if you’re an entrepreneur and not building a high-growth startup, the first one is just clarity in the business. For you to sit down and say, “Okay, am I building a high-growth startup? Am I building a bootstrap business?” I’ve done both; they’ve got pros and cons on both sides. Which one are you doing? Thinking about an exit strategy in terms of what your end-level goals are for the business gives you, the founder, clarity into why you’re building the business.

2. Show Investors How They Can See a Return

On one hand, investors want to know—especially if you see it as an angel investor—that you’re thinking big. You’re swinging for the fences; you can return the entire fund, if not more. They want to know that you’re thinking that way, but at the same time, they’re kind of sitting there and saying, “Okay, what are the different ways that I can possibly make my money back, or some more?”

There’s this entire mental maths that’s going through the investor’s head, all the way from an angel investor to a pre-C to a C to a VC to a growth-stage investor. They’re all doing all the different permutations in their heads. For you as a startup founder to have thought through the different exit opportunities along the way shows that you’re thinking about the business in a dynamic fashion.

3. Deepens Your Overall Corporate Strategy

The biggest thing when you actually think about the process of going through building out an exit strategy, is that it actually deepens all the other strategic elements of your understanding of the business. If you start to think about exit strategies, start to think about certain competitors, and look at market dynamics, that starts to flesh out a deeper understanding of your overall strategy.

How to Build an Exit Strategy

If you’re starting to get that “aha” moment or the wheels are turning, and you’re like, “You know, I should probably spend an afternoon just thinking about this,” you’re probably not alone.

The lazy way of doing this is to say, “No, we’re just gonna be profitable. I’m an entrepreneur. I’m building out my business; it’s just to me profitable, and we’ll just let it run. I don’t need an exit strategy. I never want to sell the business.” Cool.

You can also say, “You know what? We’re probably gonna get acquired by Salesforce. Salesforce is the biggest player in MarTech or SalesTech, and they’re buying companies all the time. Salesforce will buy us,” or “Google will buy us. Get M&A,” or you might say, “You know what? We’re gonna go for the moon, and we’re gonna totally IPO.”

A good exit strategy looks at these three things, and this is where we go back to whether you’re building just a profitable business—which is phenomenal—or you’re building a high-scale startup, a high-growth business that you’re looking to scale as rapidly as possible with outside capital.

Regadless, going through this thought exercise and these three components to the exit story that I’m about to show you is super valuable just for yourself—just for your own understanding of your business.

1. Key Players

Who are the key players in tiers? Ask yourself who are the key players in terms of tiers? Tiers are super important. You want to do tier 1, tier 2, and tier 3. Tier 1 are like these guys who can drop you a hundred million to $1.5 billion check—like a huge gamut range. Tier 1—they will write a big check to buy, and they could also go after crushing you or acquire your competitor and then try to crush you.

Tier 1 are the biggest players who are setting the agenda for your space. Tier 2 is like your Series B to Series D startup, and tier 3 is like someone you would try to merge with because they’re the same size as you would be in a private-to-private transaction.

2. Recent Exits

The second thing is to map out the recent exits in the space. There are two reasons why you need to look at recent exits. The recent exits tell you who’s buying and also help you understand why they’re buying, which gives you a view into their strategy.

So say Salesforce is a Tier 1 player. If they’re buying a bunch of companies in the sales engagement space, it tells you that they care about sales email a lot. If they’re not, it tells you that maybe they’re not focusing on that segment at all, and they’re probably focusing on their cloud business, their infrastructure business, or they’re going after Salesforce AI or other segments.

This is important information. If you can map out recent exits, you can start to see who’s acquiring, what’s happening, and who’s getting hired and poached. You want to have a sense of that; you can find the players and the recent exits, and you can start to understand your overall strategy.

3. Macro Trends

Map out the macro trends that are affecting your business space. This is a little tricky, but if you look at the recent exits, you can start to say, “Okay, what’s happening in the market? Why are companies paying, and why is this a trend?”

When you start looking at the trends in the market, sometimes it becomes obvious that the exits will increase because someone has a monopoly. So if you map out those things and then sit down for an afternoon, just write out a document. It starts to help you develop a clear exit strategy that isn’t just some generic cookie-cutter one. It’s tailored to your own space.

In Conclusion,

As a recap, number one is what an exit strategy is—a strategic document to help founders and investors understand how they can get out of a business at a profit. Number two is why you need one: for clarity for yourself, to show investors how they can see a return, and deepen your overall corporate strategy. And there’s how to build one out—it starts with understanding the key players in your market, then looking at recent exits in your space, and then looking at the macro trends that are affecting you overall to create a rich tapestry. That will help you not only just think through it but understand and shape your startup in a way that it can potentially be very valuable in the future.