For many businesses, external investment opens up whole new opportunities.
But while it can bring about higher ambition, it can also raise expectations. Ultimately, you’ll need to deliver a return for your investor, and that’s most likely to happen when they exit.
An investor can exit at different times and in different ways, depending on the business, the sector and the investor themselves. So it’s something you and your business may want to work into your thinking from the very start.
Planning for an exit
Most business plans have an exit strategy for investors. You may need to expand that strategy over time because of unforeseen circumstances or reactions to the wider market.
Investors will usually expect to see your plans, if only for reassurance that you have their best interests – and finances – as a priority.
While you don’t need to set out an exit strategy in great detail, investors appreciate you making your intentions clear.
But when setting expectations, it’s important to be realistic. Investors may like ambition but they’re unlikely to want to hear plans that aren’t achievable.
Investors appreciate they’re going on a journey with you and usually want to see that you understand how that might occur.
How investors exit
There are a number of ways that an investor might exit. Typically, it occurs when another company acquires or merges with your business.
Trade sale or buy-out
Some businesses start off with the intention of a trade sale or buy-out.
They may have involved their investors for this very reason – to build the company into attractive proposition for larger investors or organisations.
Some investors, such as Angel InvestorsLink opens in a new windowLink opens in a new window, may exit by selling their own shares to a third party such as:
- a Venture Capital firmLink opens in a new windowLink opens in a new window
- a Private Equity firmLink opens in a new windowLink opens in a new window
- a Corporate Venture Capital investorLink opens in a new windowLink opens in a new window
This may be more complicated than a trade sale or buy-out, as it might require more personal negotiations. But the arrival of a new investor can help many earlier investors to secure their exit.
Investors can sell their shares to another party too – the business itself.
This is called a management buy-out, where a business’ management team buys the assets of the business they manage.
This is usually an exit strategy for larger or more mature businesses, as it tends to involve significant amounts of money.
And it may all come down to timing – for example, if the owner wants to sell as well as the investors.
Initial Public Offering (IPO)
Another option is to launch onto the public markets through an Initial Public Offering (IPO)Link opens in a new windowLink opens in a new window.
This could be a chance to raise more capital from new investors. Early investors may see this as an opportunity to sell a portion of their investment too.
It can result in investors making a full or partial exit.
When (and why) investors exit
We’ve covered some of the more significant exit strategies above.
But as you can see from the varied range of scenarios, a lot depends on who’s invested and what finance has been invested and how.
Investor exits – and timescales to exit – are flexible, but Angel Investors are often in it for the long haul.
Typically, an Angel would expect to help grow a business for 3–8 years, so exits are something to build towards.
Different investors may have different motives, which will influence their approach to exiting. That’s often the case with Equity Crowdfunding.
Some investors may exit once you’ve developed a product, while others may want to wait for you to achieve a particular goal.
But there are cases where crowdfunding investors have been able to exit after less than a year. For instance, in 2015, Camden Town Brewery was acquired by AB InBevLink opens in a new window just eight months after raising £2.75 million on Crowdcube.
For Private Equity, investors are typically looking for an exit within five years.
They tend to either invest in an established company, building upon its success with the clear intention of selling for profit.
Or they may invest in companies in difficulty, seeing an opportunity to turn the business around and make a profit that way.
Venture Capital and Corporate Venture Capital
Venture Capitalists (VCs) tend to take a longer-term approach than Private Equity investors.
They’re looking for a similar exit, but they’re investing in businesses at an earlier stage.
As a result, they may expect a timeframe of 5–10 years while the business grows to a sellable state.
Exit timescales for Corporate Venture Capital (CVC) deals can be more difficult to predict. There are often a number of different drivers behind the investment.
For example, it may be that investors:
- are looking to help the business to innovate
- want to utilise its technology
- are thinking to grow the corporation they’re representing
Once they’ve reached their goals, a Corporate Venture Capital firm may look to exit.
How and when investors exit depends on how you see your business growing. Which, of course, makes planning for attracting the right type of finance in the first place even more crucial.
For more information on the different finance types, check out our Finance FinderLink opens in a new windowLink opens in a new window.
And once you have a plan in place, make sure you work in an exit strategy for your investors too. As is so often the case, preparation is key.