At Seed Do You Worry About Exit?

When founders pitch to seed investors, they get asked this question all the time, “How are you going to exit?”  Seed investors are acutely aware of the liquidity premium of cash.  They love to put cash in deals, but they certainly want a multiple of cash out.   Cash on cash return is what the game is all about.

For founders pitching, they should have some ready answers with some rule of thumb comps.  If most companies get bought for 2-3x revenue, be honest about it.  If it’s 6-8x, figure your exit value on that. If the investors are thorough with diligence, surely they will figure it out.  Stats on exit multiples are out of a founders control.  It’s set by the marketplace.  Plus, by the time the company exits, they are likely to change anyway.

You should have some legit companies that could buy your company in your back pocket.  Most startups don’t IPO anymore.  Maybe that will change if the government changes the rules, but right now that is the way it is.  At the same time, don’t list the same companies that everyone will list.  Facebook, Google and other companies that actively acquire can’t buy everyone.  Put a little bit of thought into it.  It shows you care.

Don’t fall into the trap of saying, “It’s a X billion dollar market and we only need 5% to be a billion dollar company.”  As an investor, I know if the company is successful you should get a lot more than 5% of the market.  I also know that the game is about efficient customer acquisition, and low customer churn.  In your seed pitch, talk about how you are looking at acquiring initial customers.  How are you going to get the traction necessary to get to Series A?  How are you filtering your customer funnel?  That’s important.

Talking about exit at seed is simply a part of the sales process.

Once you raise the money, do not worry about the exit.  Founders that focus on exit generally fail.  Instead, focus on building a great company culture and a great company.  The only thing that matters is growing your business to be large enough to raise a Series A.

In order to get to the Series A, set mini milestones your company needs to achieve to get there.  Think of it like hurdles on a track.  Focus a lot on process.  Building in process early helps keep things running smoothly when all hell breaks loose-and almost assuredly it will.  You can’t be married to process, but by building it in, at least you have a go to system to handle problems when things break.  After the mayhem and the dust clears, the team can discuss if it worked, and fix what didn’t.

Building a company is like washing your hair.  Lather, rinse, repeat.

Old traders used to say, “Making it is easy.  Keeping it is the game.”  For founders, raising capital is easy.  Getting to the next round is the game.