34. Exits


Investors have one eye (or two) on the exit…

Investors expect a return on their investment. For most early-stage investments, this return comes (if it ever comes) from an acquisition of the startup by another company. For a few rare companies per year, the return comes by the company listing its shares on a public stock exchange, a.k.a. an initial public offering, known more commonly by its acronym, an IPO. Both of these events are known as “exits.”


Acquisitions come in a wide variety of sizes, shapes, and terms. Typically, the acquirer is another company, and that company offers to buy all of the shares of the startup, using either cash, its own shares, or a mix of a two.

If the acquirer is itself a public company, then cash and shares are equivalent, as the shares can be sold on a public stock exchange. However, if the acquirer is a private company (e.g., a one-time startup itself, now grown up with millions or tens of millions in annual revenues), their shares are no more “liquid” than the startup’s shares, and the investors are simply trading waiting for one exit for another, hopefully one with a much larger potential.

Do note that there are two sides to every acquisition. One company (the acquirer) is buying your startup, and your startup is selling itself to that acquirer. For that to happen, the founders and investors of the startup have to want to sell the startup, to give up their ownership and control in the future of that startup. At the same time, the acquirer must want to buy the startup, to gain some advantage over continuing its business as is. For a large acquisition, such deals may take months or years to negotiate, with far more terms to agree upon than just the price per share.

With the latest wave of entrepreneurship and the fast growth of Internet-based startups, there are more and more “acquihire” exits taking place. These are acquisitions of startups aimed at hiring the founders and teams within the startup rather than buying the products and customers being built by those founders. It is not uncommon to see acquihire deals take place before a startup has ever sold a product to a customer, as well as for startups that have floundered and would otherwise have shut down and been disbanded. Acquihires can be quick, as they involve relatively small amounts of money with simple terms.

Common terms for venture-scale acquihires would be $500,000-$1 million per developer, in a mix of cash and shares. Google, Facebook, and other successful tech companies make dozens of such acquihires per year as a means of recruiting whole teams of employees, rather than hiring them one at a time.


The biggest of the exits are the IPOs. Back in the height of the dot-com bubble, a startup could “go public” through an IPO with little more than an idea, a team, and a few million dollars of venture capital money. Those days are over. Today, the public markets expect companies to reach certain milestones first, such as having hundreds of millions of dollars of revenues and, ideally, being profitable before attempting an IPO.

With that expectation, the reality is that only a few dozen companies per year go public in the U.S., and less than that in total in London, Hong Kong, and the other major exchanges. By the time a company is able to reach these large milestones, most of these companies are seven or eight years old, if not older.

Out of Business

The most common “exit” for startups is the one least spoken of. This is when the startup runs out of money and is shut down. By definition, this is an exit, but, given that the return on investment for investors is zero, these are not often talked about.

Other Exits

On rare occasions, other forms of exit come alone.

For example, Whitepages.com, a surviving startup from the dot-com era, bought out its investors by taking out a bank loan. The company was profitable, the bank thought the loan sufficiently low risk, and the investors agreed to a reasonable return on what by then had been a very long investment.


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