But UK statistics show that approximately only 2% of businesses manage an exit in that time.

Why does this huge discrepancy matter, especially now, and how can we improve this?

Whilst the reason is clear why founders want an exit to reward the intense efforts required to launch a new business, this is as true for patient investors and talents who have received equity and are waiting for their return too.

Oddly, founders don’t think much about the ROI of investors or talent who invest time and money in their project. Investors in startups cannot take dividends, so for them, the exit is the only financial reason to invest.

Our research also revealed that whilst a huge majority of founders say they want an exit, only a tiny minority have an idea of the exit they want.

For the huge majority, nothing has been formalised at all.

They don’t know how much they want from an exit, nor if they want a partial or full exit. They know even less about what their co-founders expect, as this has often never been seriously discussed. Therefore, they have not integrated the amount nor even the possibility of their exit in financial projections. As a result, their P&L projections do not fit with what is required to exit or to match their exit ambitions. This is a key reason why the rate of exits is so low. Exits are hard enough to achieve when you plan them, so if you leave them to chance, the probability to exit is virtually non-existent.

This lack of planning is also the source of misalignments with investors as, when probed by them about an exit strategy, founders tend to remain vague and even likely to improvise.

Even when sales and profits meet plans that are suitable for a hefty exit, the exit is often compromised by the lack of structure to support it. What this means is that the founding team has not put in place the talent that will replace those – including themselves – in the exit. This in turn delays the exit, but can also reduce its size or even block it.

It is therefore hard not to see a correlation between this blatant lack of planning and the very low rates of exit. It is obvious that if you do not have a target, you are very unlikely to reach it.

For an unknown reason, investors so far have not put much pressure on founders to spell out a defined exit plan, which is also why so many founders get away with it, and why the numbers when it comes to exits are what they are. However, this has changed significantly since last year’s VC meltdown. With valuations crumbling, VCs needed exits and realised that they had focused more on valuations going up rather than exit plans.

Now, often not considered is the fact that the more investors that successfully exit, the more they will invest. As raising funds has become much more difficult over the last few years, it is crucial that exits become a top focus for founders.

How can founders make things better?

Integrate the possibility of an exit into your vision

Growing a company is similar to growing a tree: if you want to know where the trunk of the tree you plant is going to grow, you need to support it with a tree stake. You do not wait two or three years to do so, but support it when it’s still small and flexible. Like anything else, the more you have an exit in mind the more it is likely to happen. So, the point here is founders should not wait to talk about exit expectations, and to form an exit strategy first.

The right questions need to be asked. Who in the team wants an exit, who does not? How much does everybody want from the exit? Is it compatible with the type of business the founders are creating and the desired level of commitment? Does everyone want a full exit, and if so, when? Who wants a partial exit? Is this a lifestyle business, a tremplin for another project, an intense but short way to make a significant amount of money or a lasting vocation? Is the exit more likely to be an IPO or an acquisition? If so, what type of buyers (PE, strategic investors…)? As ESG is becoming central in the life of businesses, often now founders have a moral stance on who should and who should not buy them, for example, petroleum companies or big corps.

Often the excitement of the beginning obscures the finality of the project, but also the real individual goals for the founders. These unspoken expectations often turn into misalignments that break businesses. Conversely, the elaboration of an exit strategy is a catalyst that brings a unifying vision about what is to be accomplished and a powerful way to align expectations. External support from exit specialists or even a chat with wealth managers will inform and reduce divergent visions and aspirations.

Putting an exit strategy in place also provides structure and is actually a very insightful business practice, even for those who do not wish to pursue an exit. The best strategy to begin with is the one that gives more options later on, and it is easier to decide not to have an exit after having planned one, rather than the other way around.

Build a vision and convert it into strong projections

Once the vision of the business and its potential exit have been defined, this needs to be converted into financial projections. One common issue we see is that founders want an exit in five years but only do financial projections for three years. Three years is often the time when the business starts to break even, so there is no indication of profitability in year five, and therefore no consideration if the business will be in a position to cope with an exit. Five years is also the duration that most investors look at for their ROI, so again, this exit planning is good business practice.

The identification of the key revenue streams and potential verticals for expansion is also important, not just for the business in general, but for the purpose of defining the exit strategy, even if, of course, startups have to remain opportunistic in their growth development. What it does is give an idea of the full opportunity of how far the company could go. It can therefore give indications of how much investment will be needed to reach full scalability, of what the structure should be, and even influence the name of the business. Too often the name refers to the first vertical, which is limiting. Jeff Bezos started Amazon as a book platform, but the name encapsulates a vision that is much wider than selling books.

Founders also usually have expertise in the vertical they start with, so looking at other verticals and associated revenue streams also allow them to get interesting insight into what resources will be needed to build towards the exit. There is no doubt that a founding team that show a vision and multi revenue streams/verticals will attract better talent and at a lower cost than a proposition that just includes their first vertical. This would have serious repercussions on valuations and therefore on the cap table, future fund raises, and exit.

As the time comes to venture into new verticals, new expertise and talent are required, and begs the question if this is also a good time for the founders to exit. That is also when a partial exit is interesting to contemplate with two potential strategies: 1) the founders bring new management to develop the other verticals, 2) the founders bring the grey suits in to scale the initial vertical whilst they stay in entrepreneur mode to develop the new verticals.

Again, it is never too early to think about those possibilities as they are integrating part of the company’s vision, which in turn will not only attract investors but also talent (for equity) who will transform the vision into reality.

Structure the business in a way to serve the vision and the plan

What makes the difference between companies when it comes to exits is not only their sales and profits, but of course their structure, and where the IP is in that structure. Once the vision and the projections have been sorted, the focus needs to be on what structure will allow the best development but also the best exit or exits in the case of an exit per vertical for example. What roles are key to continue to scale the business, especially after the founders have exited? Working with a good talent strategist – instead of a simple recruitment agency – makes a huge difference for designing a great exit. More generally, early discussions within the team and also with adequate experts such as lawyers, financial planners, and M&A specialists is ultra formative, their feedback is also a good way to gauge the strength of the proposition.

If the relationship works well, founders might even try to get them on their board. So as the company grows they can be, among other things, the voice that keeps the focus on developments towards a good exit.

All these considerations totally change the way businesses think about themselves, project to stakeholders, and therefore alter their ability to evolve. Seriously analysing from the onset all the options to build a company with a strong potential exit is a must-have exercise that all founders should get involved with, even those who think it is not an option they want to pursue. As the old adage says: never say, fountain, I will not drink of thy water.

Finally, if founders think they might want to exit at one point, there is no advantage in staying vague or unprepared. Investors can only appreciate the clarity – and that might become one reason for them to choose you.

One reason exits don’t happen is that companies that do not plan their exit always find other priorities to postpone their exit readiness.

Therefore, those who say they want to exit in five years, end up still saying that five years later, hence the super low rate of exits. This creates an underwhelming and even frustrating impression on stakeholders which ends up making the company less attractive from the first round to the exit.

This article originally appeared in the July/August issue of Startups Magazine. Click here to subscribe