The Complexities of Fintech Startup Exits: Insights for Founders
Many fintech startups today tend to implement exit strategies as part of their overall business plan. The highly competitive and constantly evolving market requires that innovative and ambitious companies have a strategy in place before their rapid growth pushes them over the edge of sustainability.
In the conditions where 90% of startups tend to fall apart, with 30% doing so within the 1-2 year period, exits are one of the ways to secure long-term success for a startup’s team. Like this, the responsibility of managing the company transfers to new owners, enabling the original team to concentrate on pursuing key performance indicators.
But in order to prepare for an exit, let alone successfully complete it, a business has to handle a number of hurdles. As a serial fintech startup founder myself, I decided to offer some insights into these challenges, based on the experiences I’ve had over the years.
Assess The Buyer’s Market And How Much Your Product Is Going To Be Worth
If you are starting a project fully intending to eventually sell it for profit, then the process of planning for an exit is something that you can begin pretty much from the start. And the very first step is to determine what kind of product you intend to offer and in what market niche. This will play a big part in narrowing down the possible clientele that would be buying your business later on. A big portion of the startups that fail tend to do so because there is a lack of market demand for their products.
Once you have narrowed down the possible buyers, you can start planning for the potential valuation at which you would be able to sell your company. Establishing an accurate valuation can be challenging due to the dynamic nature of the fintech industry and the ever-shifting market conditions. Determining the potential market size and growth prospects requires careful analysis of industry trends, competition, and regulatory considerations.
Personally, I would recommend looking for markets with the largest number of potential buyers, rather than focusing on 3-5 biggest companies that you can think of. If you can get multiple smaller companies in the same market competing for your product, your chances of successfully selling it and completing an exit go up considerably. You can also potentially play them against each other to get a better price. The good old “supply vs demand” principle in effect.
Keep an Eye on Due Diligence and Legal Considerations
Due diligence plays a significant role in the startup exit process, as buyers tend to conduct meticulous investigations to assess if the startup they’re buying is worth the investment. Your company’s assets, liabilities, contracts, regulatory compliance, and associated risks will all be looked at thoroughly. This is done to uncover any hidden issues or potential obstacles that could affect the deal's viability or valuation.
This is particularly true of the fintech industry, where compliance with various regulators often comprises about 50% of all time and effort involved in running a business. As such, you should not expect that your potential buyer would miss the absence of a particular product license. You must be a professional in all respects, including compliance issues.
Adhering to all applicable regulations in the region where you are operating is vital to safeguarding the integrity of the exit process. It is crucial to have a good legal team that will keep your business operations in line with the required standards.
That said, if you’re operating internationally, it can be hard to have legal and financial experts for every jurisdiction on your in-house team. Engaging with local outside consultants is also an option in such cases. Such people are likely to be a lot more familiar with their respective markets and would be well-equipped to assist you in navigating local compliance rules. All of which will add an extra layer of assurance that the exit phase will go smoothly for your business.
Pay Attention To Your Negotiation Tactics
When you have a buyer on the hook, paying attention to your negotiation strategy becomes crucial. Your approach here determines the terms of the deal, including the purchase price and any additional conditions. Both parties must engage in extensive discussions to reach an agreement that satisfies their respective interests.
This part depends heavily on the founders, because they are ideological and organizational leaders, and in any growing business (and even large and established ones), a lot depends on the founder. For this reason, it is exceedingly rare that the buyer would agree to make a purchase and immediately let the founder walk away. This is something that you as a founder must take into account when going into negotiations in order to make things easier for yourself.
Whether you build the dialogue with the buyer on the basis of personal charisma or hard numbers is for every founder to decide for themselves. The one thing to point out here is that the seller must always adapt to the negotiation format that is convenient for the buyer. This way, the other party will feel more comfortable communicating with you, which, ultimately, raises the odds of concluding the deal successfully.
Planning for an Exit is Hard, But the Challenges Can Be Overcome
To summarize, preparing for a fintech startup exit involves navigating a number of complexities. They can seem daunting at first, but so long as you keep cool and do things the right way, they’re nothing you cannot overcome.
Plan for your buyers and what potential valuation you can get. Account for the needs of the market that you’re focused on and keep an eye on the competitive landscape there. Finally, negotiating terms with potential buyers will boil down to how you, as a business founder, will engage the other side. Keep an eye on how they act and whether they are comfortable and open when discussing things with you. Establishing a solid bond will raise the chances of completing a deal with a favourable outcome for all parties involved.