OK, so now you know the first question on the tip of every investor’s tongue. Armed with this knowledge, what else is going to make you even more tempting to investors?
Well, investors always want to know one other thing.
So, we’re going to give you a head start on founders who won’t be prepared for this part of the investor’s examination.
Before we do, be aware not all investors are direct. The way they ask this question is not always obvious or easy to spot. It might be disguised in a series of other questions.
Remember what we said in our article The First Question Every Investor In The World Asks?
“Investors don’t invest in ideas. Strangely, investors won’t pay people to test their ideas. Investors don’t want to lose what they’ve already made. No, they would rather make more by investing in something else that is ready to make them more. Get the picture?”The Starting Block
This leads us to the second guaranteed question every investor in the world asks.
“How do I get my capital back?“
First, there a couple of pressing issues you, as a venture founder, must understand.
Investors have to work pretty hard to build their wealth. They aren’t eager to lose it!
And they will tell you there are other places they can easily put their money. And many more founders approach them than they have the capacity or appetite to support.
For every person like you, a thousand others are demanding their time, money and expertise.
Time is not an investor’s friend
Unlike you, most investors do not have plenty of time. So, make the most of the
Because building their wealth has probably taken a decade or two. So, time is now their enemy. Most don’t have the luxury of spending another decade or two rebuilding their wealth again if it all goes wrong.
“So losing their stake to every wannabe, ‘me-too; copycat or hair-brained idea is not even an option.”Daniel Mumby
But it’s not all bad news. There is something on your side that other asset classes can’t offer.
Almost every venture investor wants to work with inspired founders, who are pursuing a grand vision. They genuinely want to leverage their networks, knowledge, skills and capital in spaces that inspire them. In some respects, it’s a form of amplified philanthropy.
Which means you can incorporate that into your strategy, especially where the exit question is concerned.
Exit strategy facts and fiction
Most pitch decks we’ve read either completely ignore the exit question. Others pitch a billion dollar exit with an IPO on the New York Stock Exchange in four years.
Taking the first approach is a sign of a startup amateur. They will eventually walk away with their tail between your legs.
The second option is pure fantasy.
So let’s break these myths down and give you a better framework.
- Less than 0.13% of funded startups ever go on to IPO
- There are more recognised astronauts (336) than there are ‘unicorns’. Yes, you’ve got more chance of going to space than building a unicorn.
- More than 50% of the so-called unicorns are not worth the money they claim. Commonly, they are built on foundations of massive debt and hype.
- Less than half of all CEOs remain in a venture once it receives significant funding – $10m or more. Most are replaced by later stage venture investors, with their own man.
- The equity share commanded by the founder suite is about the same at exit regardless of whether that exit is as a $50m gazelle, or $1b unicorn.
- Almost 10 times as many ventures are acquired by other destination through merger and acquisition opportunities than reach IPO status.
- The average time that a billion-dollar company now takes to IPO is 12-13 years.
Of course, you’ll hear about cases in the mainstream media which go against the grain. These are the exceptions – the one percenters.
Naturally, the mainstream media thrives on unusual stories of success against the odds. But what are your chances of being one of them?
A fraction of a per cent at best, we would respectfully suggest.
What is a sensible exit strategy?
We would argue that you can’t possibly know yet.
Most ventures succeed with a fundamentally different idea than the
But there is a general rule to overcome this. We say:
“Start with the end in mind and reverse engineer back from there.”Daniel Mumby
Which simply means:
- Here is where we are trying to get to.
- These are the milestones we think we are going to have to pass through to achieve it.
This is where the opportunity to get a little clever kicks in.
Remember we talked earlier about amplified philanthropy? How can you possibly understand what the journey will look like if you’ve never been to the final
It’s like describing snow to someone who’s never always lived in the tropics. Try as you might, language and words often fail.
Learn what you don’t know
Experience is what matters. In fact, it’s the only thing that matters.
Here’s a pitch deck exit strategy which inspires us
“We think our exit is X, in about Y time frame. But we need the guidance of great mentors to come with us on the journey to help discover the real answers”.Daniel Mumby
Now that would get our attention. Why? Because it demonstrates you:
- Are passionate and committed.
- Have a good plan, the outcomes of which will change over time.
- May not yet have all the answers.
- Are teachable and willing to learn.
- Recognise the value of those who have walked the path before.
- Value the advice of mentors.
- Understand that it’s going to take time.
an’tdo it alone.
Think about your journey
Ask yourself these questions:
- Are you in a sprint or a marathon?
- Do you yet know the skills, resources and knowledge you’ll need to succeed?
- Do you know where it’s going to come from?
- Once you’ve presented the best case for joining you, whose decision is it?
- And is it up to you if, whether and when someone invests?
Bringing on investors is like any relationship. And exiting can be as painful as divorce.
Most don’t end well and usually in tears. Often, it’s hard to be in the same room together again, let alone hold a future conversation together.
Our advice is don’t set yourself up for that.
Demonstrate a willingness to learn and discover. Invite others to join you on your voyage of discovery. Show proof you are making progress
By doing less selling and more telling, investors will be more willing to join you at some point in the journey.
They are also more likely to invite other investors along for the ride.