Why a Strong Exit Strategy is Key to Successful Fundraising

When you’re in the midst of raising funds, your exit might seem far off and not at the forefront of your thoughts. A well-researched exit strategy, however, is a pivotal for your investor proposition.

Most VCs make their return when you exit which is why it is crucial to include a comprehensive strategy for a likely exit. 

Even if plans change over time, this strategy allows investors to better analyse the investment opportunity and demonstrates that your end goal is aligned with that of the investor. 

Here, we delve into two key exit strategies - Mergers and Acquisitions (M&A) and Initial Public Offerings (IPO) and how they feed into your fundraising plans.

Mergers and Acquisitions (M&A)

Mergers and Acquisitions (M&A) are common exit routes for startups and scaleups. During an acquisition, there is a transfer of ownership from one company to another. In the case of a merger, two companies combine into one, forming a new legal entity. The organisations involved in the transaction are typically strategically aligned, leading to significant growth opportunities as a result of access to additional resources, expanded market reach and enhanced operational capabilities.

A trade sale and a management buyout (MBO) are both types of acquisitions, however they differ in terms of who buys the business and the risks and opportunities associated. Trade sales are a great option for founders looking to maximise their exit value, take advantage of strategic synergies or expand into new markets. In contrast, Management Buyouts (MBOs) are perfect for founders who want to stay partially involved, keep the leadership team intact and avoid weathering market uncertainties alone. Each option offers distinct advantages depending on the business’ goals.

The M&A market in the UK has remained active, with 2024 continuing the trend of major corporations acquiring innovative startups and scaleups. In the first half of 2024, 162 M&A transactions involving UK startups were recorded, totalling £23.7 billion in value—a 7% increase compared to the previous year. The average deal size in 2024 reached £146.3 million, a 4% rise from 2023, reflecting an increase in valuations and intensified competition for these deals.

When presenting your exit strategy in the context of an investment round, it is important to emphasise the strategic synergies and potential return that such an acquisition could offer. By identifying comparable transactions within your industry, you can illustrate how similar companies have been valued, focusing on key metrics such as revenue multiples and EBITDA multiples. Highlighting these relevant comparisons will add credibility to your valuation. For example, if a tech company was acquired at 15x EBITDA and your company demonstrates similar or superior financial performance, you can use these industry benchmarks to evidence your target valuation.

Initial Public Offerings (IPOs)

An IPO is a significant milestone for any company, marking its transition from a private entity to a public one. Its process involves offering shares of the company to the public for the first time, allowing investors to buy equity in the company. This can provide substantial returns for investors, but it is also a complex and time-consuming process that involves high costs, significant legal and accounting efforts, extensive regulatory compliance and inherent market risks. Despite these challenges, an IPO can significantly boost a company’s visibility and credibility, leading to more access to capital for growth and expansion.

In 2024, The UK IPO market has demonstrated a rebound following a turbulent period post-Covid. In the first half of 2024, eight companies went public on the London Stock Exchange, raising a total of £513.8 million which constitutes a 13.4% decrease from the first half of 2023. However, the number of IPOs increased by 33% compared to the previous year, signalling renewed investor confidence in the UK market. Notably, the tech and life sciences sectors led IPO activities, highlighting a focus on high-growth industries.

If you undertake an IPO as your exit strategy, this will involve a detailed analysis of comparable companies that have recently gone public, including their valuation multiples and growth trajectories post-IPO. By comparing these relevant companies to your own, you can evidence your valuation expectation by emphasising the similarities in growth potential, market opportunities, and business model strength. For instance, if a similar company in your sector achieved a valuation of 10x revenue during its IPO, this multiple could serve as a benchmark to validate your company’s potential market valuation. Adjustments should then be made based on your specific growth metrics and financial health to provide a more accurate valuation.

Conclusion

Having a well-thought exit strategy is not just a distant requirement but an essential element of any fundraising plan. While your immediate focus might be on growth and scaling, investors are looking for a clear path to realising their returns. Whether through an IPO, M&A or an alternative exit route, outlining a comprehensive exit strategy demonstrates alignment with investor interests and confidence in your company’s future. Even if the specifics of the strategy evolve over time, presenting a well-thought-out plan shows that you have considered the end goal and are prepared to navigate the complexities of an eventual exit. This increases your attractiveness to investors, supporting both your valuation and your overall fundraising efforts.