As the world continues to be influenced by the digitization process, the demand for fintech services keeps growing. The outlook for this sector is highly optimistic, with reports predicting that it will reach $1.5 trillion by the end of the decade.
However, as more and more players seek to establish themselves, the competitive landscape grows that much fiercer. Meanwhile, the available funding is finite, and in 2023, it was notably lower compared to previous years. The market data from S&P Global indicates that funding into global fintech companies dropped by 49% in the first half of 2023.
In an oversaturated market where so many companies are fighting over survival, to successfully complete an exit makes for a powerful symbol of success. However, it is not a simple task to accomplish. Whether the company’s efforts come to fruition depends greatly on how the leader thinks and what strategy they choose to emphasize.
So what does it take to successfully plan and execute an exit? As an entrepreneur and startup founder with several such cases in my portfolio, I would like to share some of the insights that helped me pull through and close deals over the years.
When should you start planning an exit strategy?
First things first, if we are talking about planning a startup exit strategy, it means that you have already assessed the potential buyers in your chosen market and are considering various scenarios that may influence the value of your startup in their eyes.
As more players seek to establish themselves, the competitive landscape grows that much fiercer. Meanwhile, the available funding is finite.
The most obvious influencing factor here is, of course, the product that you offer. If you are building a startup with the intention of selling it later on, then you should consider this from the get-go. Product selection heavily influences the creation and organization of an exit strategy for the business you will be doing because it helps you define ahead of time who your potential buyers will be.
In general, with a project of any size, you will need at least a year and a half to get some kind of tangible understanding of your product-market fit. From that point, you can start planning an exit strategy.
If you have previous exit experience to draw upon, you can also take it into account. Calculate how long it took you to achieve a particular valuation in the past, and you can roughly expect that your new business will achieve a higher value at double the speed.
What factors should go into consideration when preparing for an exit?
As I mentioned earlier, if you want to successfully sell your project, there must be a reason for someone to be interested in buying it.
There are multiple components that influence the success of an exit strategy, but the foremost one is having a high-quality product — one that is reliable, stable and doesn’t have bugs. If the product is faulty, no one is going to use it. This means that you won’t be able to grow your business and, by extension, that no one will buy it.
Since products are made by people, the next critical component to keep in mind is the team. The core team members of your project must all be in-house. You can test some peripheral functions using external resources, but all the vital functions that are needed for the stable and continued performance of your business should be on the inside.
Other factors that can raise your value are things that distinguish your project in a significant way from other market participants in the eyes of potential buyers. It can be strong project economics, unique know-hows, a specific client base, and more. There are many components, and all of them are interconnected. If possible, you need to combine all of them and simulate how and why someone might buy you, or why they might choose someone else. From there, you can develop your business in such a way as to avoid this negative scenario.
What type of exit strategy should you choose?
Read more about exit strategies
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- PitchBook’s new tool uses AI to predict which startups will successfully exit
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- Remove that ‘exit strategy’ slide from your pitch deck
When considering an exit strategy, there are several options that you can choose from, including IPOs, acquisitions, and mergers. Which strategy option is best for you may vary depending on the size of the business and the stage at which you plan to sell it.
As a general rule, the larger the company and its valuation, the more difficult it becomes to exit through an acquisition. At that stage, the company may consider the option of going with an IPO and listing its shares on an exchange. It can also be a valid option if you do not have a strategic buyer capable of absorbing your business at a valuation that would suit you and your fellow co-founders and investors. Going public with an IPO exit strategy then becomes a window into a wider market of potential buyers.
Mergers, to the best of my knowledge, are the rarest exit scenarios in the fintech market. And typically those are forced scenarios, where it is called a “merge” but in reality is still a “takeover” kind of deal.
The most common method of startup exit for founders, however, is definitely via acquisition cases, when a larger company or group of companies outright buys both the smaller project’s product and its team. The most common reason for acquisitions is the larger buying company seeing opportunities to leverage the market access it possesses to boost the distribution of the smaller project’s product and make money on it.
With this in mind, if you are planning to sell your business, look for markets where the number of potential buyers is greatest. Even if they are not giants, the more of them there are, the better your chances. This may even give you an opportunity to build competition. If these companies all operate in the same market, they may be interested in buying your business at the same time. This gives you a way to increase the likelihood of a successful sale and get a better valuation for your company.
The intricate maze of startup exits is hard but not impossible to navigate
Planning a startup exit strategy is a complex process that demands a lot of attention and involves its share of complications. But so long as you maintain some core values, you can pull through and close the deal successfully.
To recap, analyze your market and potential buyers ahead of time and prepare a quality product that answers some kind of demand and that other parties would be interested in buying. Back that product up with a strong in-house team of professionals, and take time to plan your strategy.
Make sure to put proper care into establishing the foundations of your business and do not rush toward an exit at the cost of neglecting them. So long as you keep these aspects in mind, things are likely to work out in your favor.