Startup investment is often seen as a bubble; where raising the valuation of the startup is the focus of the business. However, achieving a successful exit in most investments remains a formidable challenge.
Investing in promising new businesses is attractive, but the challenge lies in turning initial investments into profitable exits. Navigating the intricate network of startup investments requires a systematic approach.
The exit strategy, a critical element of investment planning, demands careful consideration and active participation from investors.
In this article, let’s explore how to invest in startups and secure a good return, commonly known as a successful exit.
Invest Based On Fundamentals
While it may seem basic, many investors overlook the fundamentals, opting to follow the herd. In the startup sector, fundamentals encompass the potential of the idea, the founder’s execution capabilities, market size, achievable market share, entry barriers, competition, timing, and more.
Without a comprehensive understanding of these aspects before investing, you’re essentially navigating in the dark, relying on luck to reach your destination.
Navigate The Path To Exit
A common mistake among angel investors is to invest and then disengage. However, this isn’t the nature of the game. Investors must continuously monitor their investments, offering guidance and support to the company.
Remaining vigilant at every stage ensures that the investor adds value beyond capital, fostering the company’s growth and paving the way for a successful exit.
Maintain Realistic Valuations
Investors often celebrate when a company secures the next funding round at a valuation significantly higher than the previous one. However, maintaining realistic valuations is crucial. Overvalued companies pose challenges when it comes to exiting.
A new investor may be optimistic about the tale and invest in the firm for it to expand, but when it comes to exiting, the investor is significantly more conservative.
Avoid Accumulating Exits
After reaching a certain stage, typically post-Series B, startups should focus on securing both primary and secondary capital, providing exits to early investors.
Accumulating exits can lead to increased complexities, making it more challenging to exit. A cautionary tale is observed in the US listed space where companies with piled-up exits experienced a significant decline in valuation during the Offer for Sale in the listed market.
Explore Mid-Market PE As An Exit Option
While startups often look to global VCs for subsequent funding rounds, building a sustainable business opens up opportunities with mid-market PE firms in India as a viable exit option for early investors.
Additionally, strategic investors and SME IPOs serve as noteworthy fundraising options.
Cultivate Your Network
Every investor should actively build a network within the investment ecosystem. It’s not solely the founder’s responsibility to secure an exit; investors play an integral role in this process. Actively participating in the ecosystem ensures a collaborative effort towards achieving successful exits.
Embrace Long-Term Thinking And Patience
Investing, particularly in startups, is a long-term game that requires patience. The gestation period is typically five to seven years. If your investee company follows the right fundamentals and grows, a successful exit is unavoidable.
In conclusion, refining your investment strategy by emphasising fundamentals, active engagement, realistic valuations, timely exits, diverse exit options, network cultivation, and a patient approach will undoubtedly enhance your chances of successfully navigating the intricate maze of startup investments towards a rewarding exit.
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