Tuesday November 12th, 2024
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Why Founders Should Think About Their Startup Exit

We speak with experienced entrepreneurs and investors on the subtleties and complexities of exiting your business.

May El Habachi

Many founders dream of selling their startup and taking it public. After years of investing time, effort and usually large sums of money, founders hope that it will become a unicorn with a sky-high valuation, making them multi-millionaires overnight.

In reality, much like the mythical unicorn itself, such an outcome is highly elusive. An estimated 90% of startups fail, according to a report by Startup Genome. And for every initial public offering (IPO), there are over 30 acquisitions each year. The result is that the surviving startups usually grow and get acquired, without achieving unicorn status.

In a young market like the Middle East, exits are not very common. In the first half of this year, there have been 10 reported exits, a 63% decline compared to the same time last year, according to Magnitt.

With few exits taking place, it’s still important for founders to keep the end in mind. It will not only help them in attracting investors and growing the company strategically, but it will also maximize the returns for founders and investors.

So, when should founders think about exiting their business, and what are some common exit routes to consider? While there is no simple answer, there are some general guidelines to follow…

BEGINNING WITH THE END IN MIND

“Founders should be focused on building a great business, which leads to the exit,” Khaled Talhouni, Managing Partner at Nuwa Capital, tells StartupScene. “I think you can’t pre-engineer a company exit. The focal point should always be to build a great business that is providing a product or service that has a large need, and to do that profitably and at scale. And then that takes you to the exit.”

By investing time and effort in creating a solid business, it can be a strategic driver to an exit. Afterall, markets and circumstances may change over the years. What the acquisition or the IPO market looks like today may change with time, but building a great business can attract potential investors and acquirers in the future.

It is worth noting, however, that once founders accept investor money - whether it is from venture capital firms (VC) or angel investors - they need to start thinking about their exit. Investors put money in a startup for a return in the future. Failure to provide that liquidity can break the covenant between founders and investors, according to Talhouni.

“If you’ve taken on venture capital or angel investors, investors need to see that return,” Talhouni says. “They took an early risk so they can get an outsized return.”

DECIDING ON THE TYPE OF EXIT

With the end in mind, founders now need to consider their exit strategy, which is usually either a mergers and acquisitions (M&As) or an initial public offering (IPO).

An IPO is when a founder takes the business public, and shares become available for people to buy on the stock exchange. Dubai-based ridesharing platform Swvl and music streaming platform Anghami are notable examples of such IPOs. Meanwhile, an acquisition is when a startup is sold to another, typically larger company for a profit. The acquiring company might be a competitor or an industry player interested in a startup’s market share, customer profile, employees, or products and services.

M&As are usually the most common route for a startup exit. Some successful acquisitions in the Middle East over the last few years include Amazon acquiring Souq.com, Uber acquiring Careem, and Match Group acquiring Harmonica.

It’s important to note that thinking about an acquirer is different than thinking about a startup’s customer. The more founders know how to create value for a potential acquirer, the sooner they will be on their exit path.

“Most of the process or advice for entrepreneurs is to think about your customers and your product,” says Ayman Ismail, Founding Director of AUC Venture Lab. “But in this case, it’s also about thinking about the value for an acquirer, which is a very different story. Because some acquirers might be interested in the customers, some might be interested in the profits, some might be interested in access to markets in certain areas, so it depends on who is acquiring the company and for what reason. And you design the company for that value proposition.”

The biggest challenge, according to Ismail, is finding an acquirer. With few exits taking place in the region, finding an interest buyer can be difficult. This often leads startups to either sell too early, which could make them lose out on their startup’s potential, or sell too late in hopes of having a lucrative deal. Generally, the longer a startup waits for a sale, the more problems it will have with cash flow and fundraising.

DETERMINING WHEN TO SELL

This begs the question: when should founders decide to sell their business?

Sameh Saleh is a serial entrepreneur and founder of fintech startup MNZL. He previously founded Egyptian dating startup Harmonica, which was later acquired by Match Group in 2019. He believes that besides having all the right fundamentals in place for a healthy business, founders need to know the right time to exit.

Usually, the right time to sell is when a startup can achieve maximum value at the current market conditions. “If you've built the momentum and you know for sure that you will continue to deliver on your markets, and get higher market share, then don't sell, of course, because you will be selling yourself short,” Saleh says. “But if you start seeing competition eating from your margins and there are a lot of synergies that could happen, then, of course, you could at that time sell.”

Founders need to therefore think carefully about their exit opportunity, especially if they’re looking to sell their business in the near future. Today’s macroeconomic conditions are impacting startups, with many feeling the effects of inflation, higher cost of capital, and changing consumer preferences on their business.

That’s why Ayman Ismail believes that if founders are presented with a good exit option, they should consider it. “I think there has to be reasonable expectation for exit valuations, and the size of the opportunity,” he says. “They shouldn’t refuse based on aspirations that are probably higher than what they or the market can deliver.”

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