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Sloane ChildVice President

How to Build and Finance Your Company With Your Ideal Exit in Mind

Unicorns get all the love. In the U.S. especially, our culture focuses heavily on startups with billion-dollar exits, whether via IPO or acquisition. But when you look at the math—with 90% of startups failing—the likelihood of this fabled unicorn exit coming to fruition for the average startup is very slim. Those who pursue a billion-or-bust strategy often take on extraordinary risk and huge sums of external capital only to find out the hard way that their interests are at odds with those of the investors who financed them.

Rather than pursuing that elusive billion-dollar outcome, for many startups, it makes more sense to aim for an exit that is both achievable and beneficial—for all stakeholders. In many cases, taking smaller rounds and being acquired by a PE firm or strategic partner for a healthy but not exorbitant sum leads to a better outcome than taking on tons of capital and waiting for that massive exit opportunity that may never come.

Pursuing a more reasonable and achievable exit can still allow a company to build an important product that solves a real customer need while being economically impactful for founders and employees and avoiding unnecessary dilution of equity.

This often means taking into account the financial ecosystem’s most likely potential buyers for the company, rather than dreaming about a chart-topping IPO or a multi-billion-dollar acquisition). It all starts with raising the right amount of capital and pairing it with the right expertise to accelerate your path. Below we dig into how to build a successful company with a realistic end game in mind.

Targeting the $150 million ballpark

We’ve all heard the phrase, “Shoot for the moon. Even if you miss, you will land among the stars.” While it’s a great motivational line, in the world of B2B SaaS, we find plenty of exciting opportunities here on Earth.

The average startup exit price is $150 million, so that can be a good ballpark to aim for when you think about a potential exit. Data show that the financial ecosystem can easily absorb exits of that size. In other words, there is a long list of viable buyers.

Contrast that with companies who have raised early rounds at $100 million valuations—common for Silicon Valley investments. The investors writing those checks are going to want to pursue $1 billion exits—as they’re typically looking for a 10x return on that check—and likely won’t consider acquisitions for much less. The only problem with this strategy is that startups in the “billion or bust” camp will be competing for a very limited number of acquirers with the balance sheets to write checks that large. That or gunning for a mega-IPO that can often be disappointing. (Inc has a whole list in that category here).

Plus, these startups are dealing with all of the pressures associated with building a business that justifies a billion-dollar price tag. There can be accelerated timetables as teams need to show a certain valuation ahead of the next impending round and VCs have exit lifecycle requirements they want to hit. I recently shared my experience working for a startup that was on this very path and how raising a big round with some underlying product problems proved to be too much pressure for the company to survive.

So what does it take to build a business that is worth $150 million to a buyer? Businesses that have bootstrapped their way to a few million in ARR and have likely underinvested in sales and marketing are ones we look for and work to get on this path at Elsewhere.

Our goal is to get them to $15 million to $20 million in revenue over three to five years. While still an aggressive goal, we are selective in only investing in companies that we believe we can help. Because these companies have traditionally been under-resourced and sub-optimized, a relatively small cash infusion focused on accelerating sales, marketing, and product development makes growing revenue by 5-7X very achievable. If a company can also get its retention, gross margins, and customer base in line, a $150 million exit valuation becomes quite realistic.

Choose your own adventure

Not only will there be a higher volume of buyers at the $150 million price point, but they come in several varieties—offering startup founders the luxury of choice in what comes next for them. Fortune 500 buyers or the grueling IPO path aren’t the only options.

Strategic Acquirer

A wider range of strategic acquirers will be able to write that $150 million check than a $1 billion check. These are the companies whose platforms could benefit from the addition of your product features or customer base. When a strategic acquisition happens, the company is typically integrated into the acquirer’s operations, and the startup executives often lead a new division or product line. After an initial agreed-upon amount of time, the founder has the option to stay in this leadership role or move on to the next thing.

PE Buyout

Another viable set of acquirers are growth-oriented private equity firms. A buyout from a PE firm often means they’ll take a 50% or greater stake in your company, thereby shifting control.

While PE can often be considered a dirty word in startup circles (we’ll be debunking this myth soon), the reality is there are a wide range of firms who won’t chop you up for parts, but will invest their capital towards steering your company through the next phase of growth. And when we say there are a lot of these buyers, we mean it. Growth equity buyout funds raised $75 billion in 2019—a 10-year high.

Growth Equity Round

Raising a new growth equity round is another viable path at the $150 million valuation mark. This allows the founders to cash out some of their equity if they choose, while still staying engaged with the company and committed to growing it with new partners.

And unlike raising a hefty, perhaps overvalued early-stage round, the company should have the revenue, product infrastructure, growth rate, and customer base to support that valuation and take less of a dilution hit.

Exits can feel like a very dramatic shift (or even an ending) for founders, but the growth equity round path doesn’t have to be like that. At Elsewhere, if we feel that a lot of opportunity is still on the table, we can double down on our investment so the company doesn’t have to take on a new investor if they aren’t ready to. Or, if they have found a great new growth equity partner and Elsewhere believes we can continue to add value at this next stage, we will re-up and stay involved.

In this scenario, an IPO or $1 billion outcome could very much be on the table in the years down the line, but the company has done the necessary work the previous few years to build towards that path, instead of raising wild sums too early and rolling the dice before the future is clear enough.

Changing our definitions of success

The American ethos of “bigger is better” is especially problematic in startup land. We never want to discourage companies from ambitious goals, but instead help founders reframe expectations of what success can look like.

Most founders get into the game for the love of building a company and a great product, and pursuing an exit path that is realistic means they can keep the focus on doing exactly that.

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About the Author

Sloane Child

Sloane is a software investor at Elsewhere Partners where she focuses on diligence, deal execution, and portfolio value creation. Previously, Sloane worked in Business Operations for a VC-backed startup and invested in business services companies at General Atlantic. A native Texan, Sloane is passionate about bringing capital and operational expertise to software companies outside of traditional venture hubs.