The startup industry is not doing it for the money, but money is one of the most talked about thing in the startup world. Money flows in the system at a greater pace and in considerable numbers.
The scenario is pretty much clear for VCs, how they plan on making money by funding the startup at a nascent stage. For the founders, who are starting up or have already started up, its important for them to know how can they get most out from their startups.
The optimal financial strategy for founders is to start bootstrap, raise seed funding, grow their venture and take exit.
But at what stage should a founder plan his/her exit from the startup for better personal financial returns, is something we’re often confused at! A lay man would say bigger the number, better the returns, well actually in case of startups, that is not true.
How would you react if we say that a founder and his seed investors’ personal financial returns would be exactly same whether they sell that seed funded startup for $50 million or further raise a Series A round and eventually sell it for $100 million.
Yes, even after you double the valuation of your startup, you would still not make more money personally.
Here’s how!
Case 1: Start bootstrapped, self-sustain, average growth in a confined region and sell Product + Team for $2M-$10M after 3 years
After 3 years of working in your startup, bootstrapped, which has out-grown in the local region and is likely to hit a jackpot. In this case, depending upon the startup, a founder can make $2 million to $10 million personally.
Case 2: Start bootstrapped, self-sustain for a short duration, raise seed funding for further massive growth and sell for $25M-$100M after 3-5 years, providing a 6X-21X investor return
This is the point where a founder has maximized its personal finance wealth and offers very handsome return to its investors, and along the way built something interesting that actually caters to solving a problem. At this point, the enterprise can push forward and turn into an organization. After this point, it will no longer be a startup!
Hence, the best point to take an exit!
Case 3: Start Bootstrapped, grow, raise seed funding and then Series A funding. After this, the goals actually get bigger and you must be aiming to become a Unicorn
Key Assumptions:
- At exit, after standard liquidation preferences, Series A investor gets back invested funds and a decided percentage of the exit price.
- Option Pool of 15% which the Series A investor would insist on and would be the right thing to do for your growing enterprise.
Now at this point, even a $100 million exit won’t be meaningful for most VC Funds, because larger the funds (larger the risk), the bigger the exit needs to be to call it a “meaningful-exit”. This would ultimately convert into a bigger implication over an aggressive growth in a sustained period of time.
If yours is the next Flipkart or Uber, then an exception can be made, or else why bother doing it?
There may be that addiction to the startup ecosystem, the excitement of ups and downs. If that thrill drives you, then go ahead with further rounds. But the point that should be kept in mind is that the stakes of other investors are put up too, and you are not the only one in charge anymore.
Those who can choose and plan their future well-ahead, this idea is worth thinking about. Working on a bigger cause is definitely something which will be very much appreciated, but there needs to be planning for everything you’ll be doing. If you plan to take an exit from your startup, we hope now you know when you should.
DISCLAIMER: The post has been created with inputs from the source(Medium). It solely represents the idea of the author.