My startup will eventually need funding. Whether it’s being funded by angels or vc’s — they’re funding with the goal of getting a return on their investment right? What if I don’t want to ever have an exit strategy or form of liquidty event ? (sell or go public?)
Is this a real question?
I think what seems obvious to you, isn't always obvious to others. That's the beauty of this site, you can ask questions that may make you feel inadequate in a public forum.
^Like.
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Yes. It was a serious question. Thanks for making me feel teeny, it made my day. But if you'd like to contribute, I want to know why you think it wasn't a serious question. Was it because it was super uber basic startup 101?
I'm assuming that this is because you see yourself running your company for the rest of your life. There are at least two ways that I can think of right off the top of my head that will enable you to cut ties with your investors while keeping them happy with the result.
You can have them sell their shares on a secondary market, which will enable them to get liquidity, but then you'd have to deal with new shareholders. The only other alternative is to buy out their shares in the company through profits.
So, for instance if your company has $100 million lying around in profits, and your investors shares are worth $80 million then you can buy them out at $80 or even at a premium if that's what they demand, and that will enable you to reallocate those shares to employees; namely yourself since you'd then be the largest shareholder.
Not many companies are profitable though, so that's usually not an option for most investors. They also tend to want big exits, which is why they'll pressure you to either go public, or sell to a much larger company.
A company that generates roughly $100 million in revenue likely has less than $10 million in profits. However, because the revenues are so high, the company would be worth roughly $1 billion if it were to go public or be sold to an acquirer.
Assuming that the investors own at least 20%, their shares would be worth $200 million if the company were sold or went public, whereas it would take a very long time for the company to generate $200 million in profits to buy out investors at $100 million in revenue.
I hope my answer has been helpful.
In my opinion you don't need to have an exit strategy but if what you're working on isn't an exit type of company you might not want to look into angel or VC funds. Maybe a smaller funding round will due b/c if you're getting VC's involved they're taking board seats and they're going to push for that. At that point it might not even be up to you to not push your company to some sort of liquidation. The might fire you if you're not on the same page or if they don't think you can scale it. Also if you're granting convertible notes for $$ and no liquidity event is coming up they could call in the loan and if you don't have the cash you're out of business b/c they want to get paid.
exit strategies are for quitters
Generally investors are hesitant to invest in companies that don't have a clear exit strategy… it doesn't have to be an IPO it can just be a simple purchase… like a restaurant. Restaurants by famous chefs do have investors.
Other than an "exit" strategy, investors may be looking for dividends. That means they invest in you but there are clauses that say you'll pay them back X% of the money when Z happens. At the end of the day, they just want to make money and there are many ways to give them their money.
If your business is structured so that it only makes enough money to pay salaries and nothing else though, then its called a "lifestyle" business. This is a business no investor will touch. You'll probably have to get your money from family or loans.
Then give away less then 50% of your equity. That way you still run the show.
(I'm a VC.)
VCs generally want an exit. So do well-known angels. Small-time angels (sorry, don't mean to make that sound bad) are sometimes okay with other investment exits -- usually in the form of loans. For example, several years ago, one of my friends wanted me to invest in his gym. He wasn't planning to "exit", so he basically structured it as a simple loan: I could put in 25k and he'd pay me $8k/year for 6 years.
If you don't plan to have an exist, I think your main options are: bank loan; loan from friends and family; loan from an angel investor who is okay with dividends/interest payments; or bootstrapping yourself to profitability. Good luck!
IMOH, don't spend too much time worrying about it. If you're in pre-seed stage, so many things can (and will) change - your product, your customers, your market, and so on. You can't possibly know now.
Having said that, try to think in terms of what could be valuable to an acquiring party. Will it be the technology? The number of customers (if and when)? Something that could be very profitable to them (given their scale and platforms)? IP?
You need to be aware, but don't let it get in the way of building an awesome product for your users.