THE BLOG
10/10/2013 05:58 pm ET Updated Jan 23, 2014

Beginning With the End in Mind

Founders would be wise to heed the adage "Begin with the end in mind." Although an exit strategy may not seem like the first place to begin with a startup, having a clearly defined exit path is essential to attracting outside capital. Venture capitalists and angel groups are concerned with getting a return on their money within a reasonable period of time. Providing this return on investment does not come merely from building a business, but also from selling the business. Lifestyle companies that plan on steady growth over the next 10 years generally need not apply.

Many startups have the goal of being acquired. Although acquisition may initially seem more than a few years (and financing rounds) away, startups should be familiar with potential acquirers. Within a particular business area, there may be clearly defined benchmarks that start-ups will likely need to meet before potential acquirers will seriously consider them. Many large corporations view the acquisition of a startup as essentially outsourced research and development, and have specific ideas regarding how far along a company should be before it is worth being acquired. Having a sense of the time, and money, needed to reach these benchmarks is essential to identifying and securing funding from the appropriate investors.

A joint venture is another option for founders to consider. Joint ventures may ultimately lead to an acquisition, but provide an opportunity to explore the partnership first. In this case, investors may be likely to view joint ventures as a step in the funding process, rather than an exit. Joint ventures can provide access to new markets, technology, and people, but can be difficult to sustain. Those pursuing a joint venture should identify the specific goals of their strategic alliance, which can encompass anything from sharing research and development costs to growing market share or mitigating risk. While joint ventures can provide significant returns, founders and investors need to be prepared for the increased need to compromise that often accompanies joining forces.

Creating a company with the ultimate goal of licensing its intellectual property provides yet another alternative strategy. Like those looking to be acquired, those looking to license their products or technology should have identified those manufacturers that would potentially be interested in licensing their product or technology. If the ultimate goal is licensing, as seems to increasingly be the case among many biotech startups, that goal should guide the company's operating strategy early on.

A company that knows which type of exit would be most appropriate or desirable is better suited to target the appropriate amount of money and time needed to get to that exit. And remember -- a small startup that makes an early exit is often better for founders than taking on additional capital to further develop the business. Regardless of the strategy chosen, those that begin with the end in mind are setting themselves up for a more successful exit.

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