Startups are obviously riskier and require larger investment compared to small and medium enterprises (SME). Then why do investors invest in startups?
Dealing with startup is totally a matter of risk management.
Initially, entrepreneurs spend a small portion of the capital investment in a startup. But simultaneously they invest in 10 different ventures. Why? Because, they know that there is a risk of no-return. They presume that only three out of 10 startups may see success and compensate for the unsuccessful investment.
Usually, businesses show more interest on the startups they could scale up.
Exit strategy makes big difference between a startup and a SME. Most of the SMEs want expansion phase by phase and run for long time. SME founders can sell business shares if needed.
On the other hand, a startup needs a clear exit strategy. In general, there are three routes for the entrepreneur or investors.
1. Acquisition: An investor can buy a full share of a company. A company, from its initial stage, can be found as adequately valuable. For example, when Amazon acquired Twitch for $970 million, the video-game site was only three years old. But sensing the potentiality in the low cost use of its AWS, Amazon bought Twitch.
2. Initial Public Offering: A company can start IPO after enlistment in stock exchange. Google (current value is $925 million) earned only $23 million before starting IPO. In that stage, Google founders and investors were capable of selling company shares.
3. Sell on secondary market: Go-Jek, an Indonesian unicorn company and investor of Pathao, recently arranged a Series F investment of $10 billion. In that process, Series A and Series B investors sold their securities to the new investors. Generally, founders seldom have chance to sell their share at this stage. However, it depends on other issues.
Actually, there is no best exit strategy. But for the startups, it is important to map the best exit way. Uber became a large company that one stage it preferred IPO rather than acquisition, because there were a few companies having solvency to buy Uber.
Shortly, we should keep it mind that investor or founder needs to know about exit route so that all the investors could earn profit.
Maybe your startup sees no success or fails in scaling, but you must not worry about it. In context of the Covid-19 effect, we should understand this with more importance. Gaining profit in such an extraordinary situation seems really challenging. In that case, you can transform your business into a ‘lifestyle’ company. It means that you can keep the venture in equilibrium position or leave it without any future plan about investment or exit. When a downfall is evident, more investment would not be a good idea.
Although a startup needs to grow as a profitable entity, there should be plan for its smooth exit as well as keeping its share price high.
Actually, policies differentiate startup from SMEs. There should be a match between risk and compensation. This is important for Bangladesh-based entrepreneurs to find the reason of foreign investment. Why should a foreign enterprise invest in Bangladesh if there are opportunities of similar profit at its origin?
For foreign investment, there must be scope of more returns.
Now what would be your new enterprise? Startup or SME? As a founder, you need to differentiate this so that investors can get a clear idea about your venture.
Rahat Ahmed is founding partner and CEO, Anchorless Bangladesh. This feature appeared in the print and online edition of Prothom Alo and has been rewritten for the English edition by Sadiqur Rahman