It’s the Exit, Stupid!

If there is one thing to understand about how investors view your pitch its this: we don’t make money until “the exit” or “liquidity event” — either the sale of the business or an IPO when the stock in your company can be sold. Until then, the equity we’ve bought in your business is nothing but a number on a spreadsheet. No matter how many millions it might be worth in theory, we can’t use it to purchase even a single pizza. Unlike public stocks, it can’t be bought or sold; unlike a loan, it pays no interest (though a convertible note accrues interest that gets paid in additional equity); unlike real estate it generates no income; and unlike stacks of hundred dollar bill hidden under the mattress, we can’t use your stock to buy a car, or even dinner. It’s dead money, locked up until the exit.

So what does an investor want — that should be obvious now: an exit. As fast as possible, for a large multiple of the amount invested. Nothing gets an investor excited as about your business as hearing that competitors and strategic partners are already sniffing around, interested in buying your business as soon as its viability is proven.

A good pitch tells a story. Not how you have a great product that solves a huge problem. Not your founder’s journey. Not how you have an all-star team and critical patents that will lock out competitors for eternity. Not how you’re going to generate a gazillion dollars in revenue at zero cost and be the most profitable company ever. These are all important plot points that get you to the climax — some big company with plenty of cash will find it necessary to acquire your business at an exorbitant price and hand investors (including you) a fat return on their initial outlay. If you’re gunning for unicorn territory, an IPO is also a possibility.

Just like any good book or movie, the climax comes at the end. The next to last slide in your pitch is your exit strategy, right before the ask (deal terms). It’s the culmination of everything that came before, which should lead up to the question: who will find it advantageous to acquire your company, when, and for how much.

Most pitches I see are basically modified customer pitches: we have a great product that’ll solve somebody’s problem. But the best product in the world is a lousy investment if the company is never acquired. Conversely, if it’s clear someone will want to acquire the business quickly, it doesn’t matter how stupid the idea, it’s still a good investment. As you’re crafting your investor pitch, start from the exit strategy. Then make sure all the other pieces lead straight to that conclusion.

The pitch to investors, though, won’t matter if it doesn’t match your business strategy — you’re building the business to be acquired (or IPO) at as high a valuation as possible. This means that when you accept investors’ money, you’re implicitly agreeing to two related things: (1) you intend to grow the business as big as possible as fast as you can; and (2) that your one and only goal is to sell the business quickly.

As investors, unfortunately, building a profitable, sustainable business gets us nothing. Your strategy is go big or bust. Damn the torpedoes, it’s full speed ahead. A business that survives, hires employees, makes customers happy, and even generates profits is great for you, great for customers, great for the economy, but for us, it’s a bad investment. If your strategy is to offer investors dividends, that’s a different kind of investment and a different kind of investor. I personally dislike this mentality and will discuss alternatives in future, but if you’re looking for investment from VCs and angels, that’s how the system works. Acquisitions of startups are typically done based on a multiple of revenue (private equity acquisitions are based on EBITDA — essentially profits, but valuations are too low and time frames too long to be attractive to VCs and angels). Higher revenues = higher valuation = higher return to investors. In other words, profits serve one purpose — more money that can be plowed back into growth to generate more revenues.

Even more difficult for some entrepreneurs is that your one and only goal is to sell the business as soon as possible. Ideally, that’s in 3 years or less and no longer than 5 years (except for life sciences, which have different timelines and economics.) Your goal is not to build a great product, solve people’s problems, or make the world a better place. Those things are just the means by which you’re going to build a business that someone bigger will pay you a boatload of money to take off your hands.

The key takeaway here is that a great business is often not an “investable” business; for an investor, ultimately it’s about the exit and only the exit. So if you want to attract angels and VCs, you need to structure not only your pitch but your entire business model the exit. It will affect everything about how you build, operate, and grow your startup. So please, before you craft your pitch deck, ask yourself, honestly, if this is the road for you.

Join me next week when we get started on building a pitch deck that will get investors excited. Sign up to receive your weekly insights below.