From Idea to Exit: How to Plan Your Startup Fundraising Strategy

Out of all things on the founder’s mind, a roadmap for investors, including the business exit planning, isn’t likely to be at the top of the list. Maybe not even near the list of priorities at all. When it comes to funding, the majority of startups get bootstrapped or privately funded. 

• According to Fundable, 57% of startups get funding by founders taking out loans and putting charges on their credit cards. After all, MVP development, especially with the arrival of no-code and low-code tools, can start at 5k to 10k USD from scratch to a marketable MVP app. 
• The other 38% acquire initial funds from family and friends. This is also enabled by relatively small starter costs for a market-ready product. 
• Only about 0.91% of startups take the route of angel investors and 0.05% of venture capitalists. Those are usually tech startups, SaaS, scalable marketplaces, and such.

However, even if you take a bootstrapped route, you might still want to opt for a startup fundraising strategy moving to the next milestones, such scaling or expansion. At the same time, thinning about exit strategy applies to all, privately funded or funded by investors. As an example, Mailchimp was bootstrapped all the way up until its exit through acquisition by Intuit. Founders self-funded the business and exited:

“Intuit has closed the acquisition of Mailchimp for total consideration of approximately $5.7 billion in cash, 10.1 million shares of Intuit common stock with a fair value of approximately $6.3 billion…”

As such, a startup roadmap for investors and exit are essentials for every startup regardless of their first route to funding.

Developing a Roadmap with Analytics in Mind

In our article “Using Analytics to Shape Your MVP Roadmap”, we’ve outlined the importance of data-driven product development for startup success. Moreover, the same principles apply for getting investors as well, whether they are angel investors or VCs (venture capitalists). In short, startup roadmap includes the following milestones:

1. Idea Validation
2. Launching the Leanest First Version
3. Refining Product-Market Fit
4. Scaling
5. Iteration & Expansion

Idea Validation

Obviously, most startups will not require funding to go through the idea validation stage. Additionally, VCs rarely back any companies this early. However, there are exceptions that require a startup fundraising strategy. They are medical startups where building an initial prototype can be capital-intensive. Or custom IoT solutions. Angel investors can also step in if the idea is highly technical, such as when there is a need to develop and test a specific biotech algorithm or an AI/ML one.

Launching the Leanest First Version

For launching the leanest first version, again, in most cases, the startup can be self-funded. However, exceptions needing a startup fundraising strategy will include mobile apps with complex backends, or again, something along the lines of IoT, robotics, IoMT, and such.

Refining Product-Market Fit

For refining product-market fit, some startups can already consider going to investors. At this stage, there are just too many cost drivers that cannot be self-funded. At the same time, the pressure from competitors to capture the market share is high. So, as a founder you would need a lot of capital at once rather than extending it over long periods of time. Examples of cost drivers include: 

• hiring more developers, 
• going for advanced features, 
• marketing costs, 
• customer support, 
• onboarding systems, and 
• advanced analytics (custom dashboards, analytics automation, A/B testing, etc). 

In addition, this is the stage where startups often fall into the trap of funding limbo. Founders do not always prioritize metrics on a consistent basis from Day 1. In addition, when the startup is small, there might be no management to work out quantifiable strategic plans. As such, there is a problem with convincing VCs to invest. The following section will outline key metrics for each of the mentioned startup roadmap milestones.

Scaling: The Need for Startup Fundraising Strategy

The scaling stage is a typical point where startups go for A/B series funding. Here, the funds go to:

• marketing at scale, 
• building global infrastructure, 
• expanding servers, 
• international compliance, and 
• local compliance for new markets, etc. 

Iteration & Expansion & Business Exit Planning

The expansion & iteration stage is suitable for B/C series funding and growth equity. Often, it is used by startups that are seeking to acquire other startups, go into verticals, invest big into R&D, or prepare to exit themselves.  

Investor Considerations and Metrics: Startup Fundraising Strategy

As we’ve discussed in the article “Using Analytics to Shape Your MVP Roadmap”, metrics will vary widely depending on the nature of the business. For instance, a SaaS startup versus a social media one will choose different metrics to reflect their progress. Therefore, for the purposes of a startup fundraising strategy, we’ll focus on those that will capture the attention of angel investors and VCs.

When There Is No Startup Fundraising Strategy: Funding Limbo

Usually, based on the costs of milestones 1 and 2, founders get by self-funding, funds raised from friends/family, or small pre-seed funding. Funding limbo is the term that often applies to moving from Milestone 2 – early MVP to Milestone 3 – refining product-market fit. 

After you’ve launched the early version, you are often able to showcase some early traction from early adopters. However, a startup may not be able to show stronger metrics – such as LTV:CAC, revenue, and growth beyond early adopters (usually Milestone 3 metrics) – that Series A investors would like to see. However, refining and expanding MVP beyond Milestone 2 often requires more significant funds. In cases of capital-intensive businesses, such as medical startups, robotics, and IoT, future development is impossible without Series A funding. Therefore, the ability to introduce proxy metrics at the end of Milestone 2 is the only way to go. The example below will show how to do that. In addition, it is often worth considering when preparing an investor pitch deck as part of your startup roadmap.

Example: How to Avoid Funding Limbo for Medtech Startup

To avoid the funding limbo, you can start thinking about unit economics early, depending on business type. This can be further enhanced by breaking down the user base into cohorts. However, even if you have only early adopters, you can still calculate stronger metrics in proxy format. 

For instance, even if it is a medical SaaS business, and you have only the first 50 paying customers, you can:

1. Calculate Customer Acquisition Cost (CAC);
2. Estimate proxy Lifetime Value (LTV) based on external factors: these can be industry averages, competitor analysis, or letters of intent (LOIs)/contracts.
3. Factor in gross margin and average revenue per customer to adjust the proxy LTV. For instance, proxy LTV = ARPU(120/month, internal)*0.7(margin, internal)*15months(average lifespan, external)= $1,260

Having this, you can calculate the LTV:CAC that needs to be higher than 3 times. So, if you have CAC around $100, your LTV:CAC is 1260/100=12.6, which is clearly more than 3 and will be attractive for investors. However, if it is a medical startup, CAC is often around $921 per customer, and in this case, 1260/921=1.37. As such, you need to increase profitability to surpass a 3x ratio before going to Series A investors. Below, you can see the average CAC by industry.

Business Exit Planning: 3 Essential Strategies

In the introduction, the Mailchimp case was mentioned. It is an example of a highly successful acquisition. The founders ended up with cash and Intuit stock, and the latter can grow in value over time. However, it was a complete buyout. So, the founders did not retain any control over Mailchimp, and the company went fully under the control of Intuit.

Chime, a digital banking startup, went the IPO route. It listed its shares on Nasdaq, and its investors sold about 6.1 million shares, bringing them almost $165 million. Overall, the company sold 25.9 million shares and brought the company $700 million in funding. Following an IPO route, the company issues shares at different levels in relation to control over the company, and the founders manage to keep control through preserving voting shares. 

An example of a management buyout is My Digital, a UK-based payroll and accounting software. Prior to the management buyout strategy, My Digital raised around 1.2 million pounds from NPIF (The Northern Powerhouse Investment Fund). The management buyout involved paying back the investment amount plus the growth rate of shares. So the investors get their money back with profit, while the company gets its full control of the company back. 

IPO (Initial Public Offering)

The digital startup in private ownership can start selling its shares to the public, which is what an IPO means. However, the IPO startup fundraising strategy is less and less frequent. In fact, the drop is from 83% in 2010 to only 11% in 2024. Now, it is mostly unicorn startups that consider it. The reason lies in a complex compliance process. With the IPO, a company has to be made transparent to the public who will buy its shares. This includes regular reporting according to SEC requirements, compliance with internal processes under the Sarbanes-Oxley Act, strict audits, and more. All this deters companies from going this route, mostly in favor of the acquisition route. 

Acquisition – Selling a Company

Overall, in terms of business exit planning, a large share of VC-backed startups get acquired by VC-backed buyers. 

Other sources of acquisitions are:

• large tech companies (for instance, Google acquired over 237 startups since 2001.),
• corporate venture arms, 
• private equity firms, 
• non-tech industry buyers, 
• high-net-worth individuals, and 
• Special Purpose Acquisition companies (SPACs). 

Below are some major acquisition exit deals, such as Wiz acquired by Google for $32bn. Overall, acquisition is the most popular startup exit strategy.

However, acquisitions at a large scale also a subject to regulatory compliance. For instance, Adobe wanted to acquire Figma for $20 billion which was blocked. The consideration for the healthy competition was enforced by antitrust regulators in the USA and Europe. Figma is the major competitor to Adobe and they could not allow for Adobe to dominate the market single-handedly. The Adobe had to pay the break up fee of $1bn to Figma.

Management Buyout (MBO)

Management buyouts (MBOs), in terms of business exit planning, have also risen in share as more and more private equity funding got available. In the USA and Europe, MBOs now account for 20% to 25% of all private equity exit strategies according to Investopedia.

As startup grows, founders hire management to help grow the company. The MBOs goal is to shift control from founders and shareholders (mainly investors) to management who has been operating company and knows the business. The main reasons to take this route are:

• Founders’ decision to quit or retire;
• Following growth potential that management envisions;
• Sourcing more funding through private equity support – they tend to trust management more as management is skilled at strategizing for growth;
• Corporate realignment – when the business falls out of core strategic focus, and is sold to management.

Since MBOs require the management to come up with large amount of funds, it is often financed through private equity (PE) companies. PE companies often retain control for 4 to 7 years before exiting, and provide operations and strategic support. Though, management also invests some share of their money.

For instance, the MBO deal is $100M. Management puts in $5M, PE puts in $70M, and the other $25M is debt. The equity is shared, not proportionate to the amount invested. So, the management owns, for example, 20% of the company, while the PE firm owns the rest – 80%. Let’s say the company is sold for $300M five years later. Management receives $60M from the sale, while the PE firm receives $240M. 

Final Thoughts

Overall, looking at startup roadmap, milestones 1 and 2 can be self-funded and it is often the preferred choice. Except for a few businesses that are capital-intensive from Day 1. 

Looking at the Milestones 3 to 5, where there is more advanced functionality, marketing at scale, growing infrastructure, legal considerations, and competitive pressure, going to investors is the only viable route. 

Founders should prepare for the Funding Limbo between Milestone 2 and Milestone 3. The way to convince serious investors at this stage is to focus on stronger metrics and calculate their proxies. This will require external research and strong focus on financials. 

In terms of business exit planning, IPO, Acquisition, and MBO are the three most frequent options. However, IPO is getting less popular due to legal pressures and increased private equity companies. The latter drives the growth of acquisition and MBO routes. 

FAQ: From Idea to Exit: How to Plan Your Startup Fundraising Strategy