Why exit strategies are important in startups?
As an investor you want to make a profit; it’s that simple. In order to do this effectively there are two broad approaches: revenue and sale. A revenue model is one which generates finances which are then split up amongst investors on a regular basis. A simple example of this would be to buy a house and then let that house out to a tenant. There may be a substantial investment at first, but each month that property generates income, over time recouping the cost of the investment. While investing in a startup which generates regular revenue is beneficial, more substantial profits usually lie in the selling of the business. Furthermore, if the value of a startup starts to dip an investor could lose a substantial amount of their initial investment.
By having an exit strategy an investor is able to maximize their profits, selling their share of a business when it is either at its most valuable, or in order to stop any further losses. A successful investor always plans ahead, and with such a plan in place can quickly react to new eventualities which might require a swift exit.