Definition by the book
An exit strategy is a contingency plan that is executed by an investor, trader, venture capitalist, or business owner. It's done to liquidate a position in a financial asset or dispose of tangible business assets once predetermined criteria for either has been met or exceeded.
In the case of start-up businesses, entrepreneurs plan for a comprehensive exit strategy in case business operations don't meet predetermined milestones or if it's successful at making a substantial profit.
If cash flow draws down to a point where business operations are no longer sustainable and an external capital infusion is no longer feasible to maintain operations, a planned termination of operations and a liquidation of all assets are sometimes the best options to limit any further losses. If the company is succeeding or exceeding KPI, desirable ways to exit a business include initial public offerings (IPO), strategic acquisitions, and management buy-outs (MBO).
What it really means
A business exit strategy is a plan for what will happen when you (as a founder) leave your business. Just like you’ve written a business plan to guide your business throughout its life, you should have one that guides it to a conclusion.
Successful investment paybacks normally require an exit event. The exit is what gives them a return. The exit strategy in relation to start-up funding is what happens when investors, who had previously put money in a start-up, get money back, usually years later, for a lot more money than they initially spent.
Two popular and possible exit ways are:
- The business gets acquired by a bigger company for enough money to give profit to the founders and a return to the investors (e.g. Nest acquired by Google in 2014 or Skype acquired by Microsoft in 2008)
- The business grows and prospers enough to eventually register for selling shares of stock to the buying public over a public stock market, as it happened with Beyond Meat in 2019.
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