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A reverse-engineering approach of financial exits allows you to define a company profile and growth rate that align with your medium- or long-term goals. This backward planning is relevant for all entrepreneurs, as it enables you to anticipate liquidity events required by your investors or manage transitions determined by either unforeseen dramatic circumstances or long-anticipated plans.
One of the main advantages of creating a business plan lies in clarifying your long-term goals. Starting from these goals and the exit horizon of certain shareholders and/or leaders, you can engage in a form of strategic backward planning to achieve these objectives as efficiently as possible.
I refer to the notion of reverse engineering to describe a process that clarifies many strategic and financial dilemmas. This approach, which involves « placing oneself in the future to observe the present, » is like the metaphor used by Bernard Charlès, Chairman of the Board of Dassault Systèmes, co-author of The Renaissance of Industry, and co-founder of a research chair on modeling imaginaries. This is indeed the type of modeling in question.
Referring to the startup logic, a company funded by venture capital is intended to de-risk an innovative offering and grow quickly enough to become both a positive acquisition opportunity for a large group and a serious threat if a competitor expresses interest in your business.
This de-risking strategy can also be implemented with near self-financing, in bootstrapping mode, a metaphor referring to the adventures of Baron Munchausen. However, without venture capital funding, the acceleration will not be the same, and the exit will be more distant.
According to investment bank Avolta (2022), 60% of exits involve companies not funded by venture capital. However, these companies take longer to be sold: the median time is 15 years compared to 9 years for venture-funded companies.
Reverse Engineering Applied to Your Business Plan
By adopting this backward-planning logic, what will your development trajectory look like?
If you want to accelerate through investment funds, it’s in your best interest to perform a reverse-engineering exercise based on this exit objective, also known as a liquidity event. This type of exit is the primary goal of your investors, and to meet it, your development strategy will involve optimizing timelines and exit valuation. Here are the steps to take and the main parameters of the equation:
- Anticipate your various funding rounds from creation to exit and estimate your equity needs.
- To meet the return requirements of investors and leaders, at what price will your business need to be sold or go public?
- Based on the valuation criteria applicable to you, what should your company’s profile be at the time of the exit? Describe this profile in terms of technology maturity, revenue, audience, impact, operating income, and geographic reach.
Keep in mind that the median exit timeline for a venture-funded startup is 9 years: 3 years to secure seed funding and another 6 years to reach the exit, with a median amount of €38M based on a revenue multiple of 4.1 (source: Avolta). By then, our « median startup » will have raised €4M and will have a revenue of €38/4.1 = €9.3M. Can you « do better, » faster, and with more or less capital raised?
Strategic Backward Planning: A Mix of Art, Science, and Circumstance
Such a backward-planning exercise lies at the intersection of art and science, but it also depends on circumstances.
You must be able to justify your choices and share your medium- and long-term objectives with your key stakeholders. In exceptional circumstances, this will involve a very limited group of people.
This reflection is not exclusive to startups; it applies to all entrepreneurs, if only because none of us is eternal, and sooner or later, preparations for the transfer of your business must be made, even within a family setting.
Retirement, Life Changes, or Health Issues
If one of your partners wants to « change their life » and sell their stake in two or three years, it will inevitably impact your development strategy and prompt you to consider your own future role in the company.
Such medium-term questioning has sometimes revealed that partners who otherwise get along very well can choose very different paths. The impact on your business plan is obvious, but you must address the issue.
In a more dramatic sense, health issues can also affect your growth strategy and your own exit horizon.
I have been privy to situations where a leader urgently needed to slow down or risk jeopardizing their health. In this case, hypergrowth and the associated pressure are no longer an option, or you must reorganize to avoid bearing most of the managerial burden. This daily pressure is the lot of most entrepreneurs.
Best of luck with this exit reverse-engineering exercise for your business and the crucial decision of whether to seek investment funds to accelerate your growth!
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