MSMEs urged to plan exit strategies to attract investors

Micro, small, and medium-sized enterprises (MSMEs) operators have been urged to build exit strategies into their business plans from the start, as investors increasingly prioritise how they will recoup capital over the strength of the idea alone.

Cynthia Chisom, partner, research and advisory at Starup Development Centre, said investors now assess potential exit routes before committing funds, making long-term planning a key factor in attracting venture capital.

Chisom, speaking on the topic “Nigeria’s Startup and Venture Capital Ecosystem: What’s Changing?” on BusinessDay Morning Live, explained that investors, when making business decisions, go beyond the companies they invest in to how they are going to exit that investment.

“Investors are looking at the opportunities to exit in a particular market, and are also tying that with their investment thesis.

“They’re looking at how long it would take for an entrepreneur to reach specific numbers from as low as $1 million to as high as $10 million annually, and the market usually is the biggest determinant for that,” she emphasised.

While an exit strategy may seem relevant only to large corporations or venture-backed startups, it is equally important for MSMEs. Having a clear exit plan from the outset helps entrepreneurs make better strategic decisions, attract investors, preserve business value, and ensure continuity when it is time to sell, transfer ownership, merge, or step away.

In today’s competitive business environment, the most resilient enterprises are those that not only plan for growth but also prepare for a successful transition from the very beginning.

Besides, Chisom disclosed three cardinal forces that mirror the qualities of startup founders and explain why they struggle to survive. The first, she said, has to do with the industry, which is the macroeconomics, the microeconomics, the industry dynamics, the different sectors and the players, and basically the opportunities in the value chain that can impact the survival of the company.

Secondly, she said there is the ecosystem force, which is the surroundings where the entrepreneur is operating. For instance, a startup in Abuja has a different ecosystem from the one in Lagos. This, she said, in itself has an impact on the survival of the business.

However, Chisom explained that there is also the internal venture force, which has to do with the founder’s capacity to execute, know the team, the quality of the team, the operational and organisational structure, the level of governance, and the quality of knowledge that the founders have with regards to executing strategy.

Nevertheless, beyond funding, she pointed out the need for MSMEs to embrace strong mentorship, networks, and strategic guidance.

“I mean, even after you receive capital from a venture capital fund, it’s still expedient that the venture capital firm provides more than just that funding; they should be able to give you strategic guidance, open doors, provide consistent mentorship and network for that startup to grow,” she said.

For SMEs finding it difficult to raise capital, she emphasised the need to be investment ready in order to attract capital from investors.

“Entrepreneurs who want to start raising funds must go through an investment readiness process; we have organisations that are dedicated to helping startups become investment ready.

“Being investment ready cuts across several things, such as the entrepreneur’s data, which basically contains all the necessary documents, from financial audits to IP documentation, down to simple things, such as co-founders, agreements, and the number of investors who have come in before, among others,” she noted.

SMES must have their data room ready in terms of documentation that covers their financial model. However, it is important to note that investment readiness does not just cover one’s documentation, but also covers strategy building, because the expectations of venture capital funding require a certain kind of growth that a founder has to be mentally prepared for by strategically being prepared by putting together the right strategy towards the kind of growth that is required.