While starting a business it is important to consider how and when you will see returns on your investments. Different founders have different timelines and expectations for when they will receive returns. Especially if you are taking on outside investors, it is important to consider what is the end-game – how you will ultimately see a return on your investment.
Approach 1: Initial Public Offering
One approach to seeing a return on your investments is to sell shares to others – potentially via an Initial Public Offering. Going down this route, and making the firm trade publically, provides a means for founders and investors to realize a return on their investments – selling shares to others.
Once a firm has publically listed, it becomes a lot easier to trade shares than it otherwise is. This provides an exit for investors and founders to reduce their ownership stake in their firms – selling the shares to others. It is one of the exit strategies that venture capital like – the possibility of listing the company, and in the process selling off their stake for hopefully a significant premium than was initially paid.
Approach 2: Acquisition by another firm
Another exit approach is an acquisition by another firm. While being acquired pre-supposes that another firm would want to buy your business, it can be an approach for founders and investors to see an immediate return on their investments.
Approach 3: Returns from the profit of the business
A final approach, albeit not really an exit, is to continue to hold the company – making returns off the profit that the firm makes. For many company founders, this may be the intended approach for making money. Rather than seeing the profit as coming from selling to others, many founders see the return as coming from the profits that the company generates.
The challenge comes however that many investors don’t want to hold the company long-term. Their goals may not be to generate money from the constant stream of profits, but rather the expectation that the company will be worth substantially more several years in the future, and by selling their stake on, they can realize a return.
Final thoughts: Be aware of the timeline of your investors
When considering the end-game of your company, it is important to be aware not only of your own preferences but also the preferences of any investors that you are working with. A misalignment between goals – where investors are expecting a substantial payout several years down the road, while founders want to hold the firm and make money off the returns, may cause a significant rift.