A Beginner's Guide To Understanding Exit Strategies For Fintechs

What is a Fintech Startup?

A fintech startup is a company that uses technology to innovate and disrupt traditional financial services. These firms use software, algorithms, and digital platforms to provide a diverse set of financial products and services, such as banking, lending, payments and investments, insurance, and personal finance management. Examples of these fintech startups in Nigeria include; Flutterwave, Interswitch, Paystack, Cowrywise, Renmoney, Piggyvest, etc.

 Fintech startups frequently seek to offer more efficient, convenient, and accessible financial solutions than traditional brick-and-mortar institutions. They might range from modest, early-stage startups to well-established firms with a strong market presence.

What is an Exit Strategy?

An exit strategy is a plan on how an investor sells their stake in a startup and receives a return on their investment. The exit event generates liquidity for investors who have taken the risk of backing a young company.

An exit strategy may be executed to exit a nonperforming investment or to close an unprofitable business. The purpose of the exit strategy is to limit losses. It can also be executed when an investment or business venture has met its profit objectives.

An effective exit strategy should plan for every positive and negative contingency, regardless of the investment or business venture. An exit strategy is a business owner's strategic plan to sell ownership in a company to investors or another company. It outlines a process to reduce or liquidate ownership in a business and if the business is successful, make a substantial profit.

Importance of Exit Plan

• Goal Setting: Having an exit plan with specific goals helps answer important questions and guides future strategic decision-making. For example, a startup's exit plan might include a future buyout price that it would accept based on revenue turnover. That figure would help make strategic decisions about how big to grow the company. To reach a predetermined sales target.

• Mitigating Risks and Uncertainties: it is essential to have an exit strategy for what happens when things don't go to plan. The Fintech landscape is dynamic, and associated with regulatory changes, technological shifts, and market fluctuations. An exit strategy provides a safety net against unforeseen challenges.

• Succession Planning: An exit plan specifies what happens to the business when key personnel leave the business. For example, an exit strategy might stipulate through a succession plan that the company passes to a particular person or group of persons or that they sell a stake to other owners or founders. Carefully detailed succession planning of an exit strategy can help prevent or avoid potential conflict in the future.¹

Strategies for a Successful Exit

Choosing an exit strategy is dependent on many factors, such as how much control or involvement investors want to retain in the business, whether they want the company to continue being operated in the same way, or if they are willing to see it change going forward.

The exit strategies commonly used by startups include IPOs, strategic acquisitions, and management buyouts (MBOs). Most companies typically select an exit plan before launching a business that fits their longer-term development decisions and goals.

The various exit strategies that a Fintech startup can adopt include;

1. Initial Public Offering (IPO): An IPO is when a company decides to sell shares of its stock to the public for the first time. It's a way for companies to raise capital from investors and to become publicly traded on a stock exchange, and also provide an exit path for early investors.
2. Strategic Partnerships and Alliances: Collaborating with industry players can lead to joint ventures, mergers, or acquisitions. For example, a cybersecurity-focused Fintech, partners with a major bank to enhance its fraud detection capabilities, and eventually, the bank acquires the company.
3. Acquisition: Selling your Fintech Company to a larger player is a common exit route as it provides liquidity and synergies. It's a strategic move for companies to expand their business, enter new markets, gain access to technology, or achieve other goals.
4. Secondary Market Sales: Selling shares to private equity firms, institutional investors, or other interested parties. For example, a Fintech lending platform allows early employees to sell their vested shares to a private equity fund.
5. Management Buyout (MBO): This is where the existing management team buys out the company from external investors. For example, the founders of a successful robo-advisory firm purchase the majority stake from venture capitalists, gaining full control².

In the fast-paced Fintech ecosystem, an exit strategy isn't an afterthought, it is a strategic necessity. Understanding these exit strategies can help fintech startups navigate their growth trajectory and maximize value for stakeholders.

Footnotes

1. https://fastercapital.com/content/Fintech-exit-strategy–How-to-plan-for-a-successful-exit-and-maximize-returns-for-yourself-and-your-angel-investors.html#:~:text=your%20angel%20investors- ,1.,Importance%20of%20an%20Exit%20Strategy&text=An%20exit%20strategy%20is%20like,IPO)%2C%20or%20other%20means

2. https://fastercapital.com/content/Fintech-exit-strategy–How-to-plan-for-a-successful-exit-and-maximize-returns-for-yourself-and-your-angel-investors.html#:~:text=your%20angel%20investors- ,1.,Importance%20of%20an%20Exit%20Strategy&text=An%20exit%20strategy%20is%20like,IPO)%2C%20or%20other%20means

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.