Exit Strategies for Investors: What Every Biotech Founder Should Know
One of the key concerns for investors when backing a startup is understanding how they will eventually see returns. This is especially critical in biotech, where exit planning must contend with lengthy clinical and regulatory timelines. A well-defined exit strategy is essential for both founders and investors as it clarifies how ownership of the startup can be transferred in the future and ensures that investors have a path to liquidity. In this post, we'll cover the basics of exit strategies, explore common options, and explain how founders can align their plans with investor expectations.
1. What Is an Exit Strategy?
An exit strategy is a planned approach for how owners and investors can sell their stake in a startup and get a return on their investment. It typically comes into play once a startup has grown to a point where it becomes valuable to strategic buyers, the public market, or other investors. For founders, having a clear potential exit plan shows investors that they have thought through long-term business growth and financial sustainability, often detailed in both the business plan and the strategic plan.
In biotech, exit strategies also require careful planning around prolonged clinical trials and regulatory approvals, which can greatly influence timing and valuations. By integrating these factors early on, founders can design a roadmap that not only targets future liquidity but also aligns with critical R&D and market-readiness milestones.
A well-defined exit strategy helps guide business decisions, investment strategies, and corporate growth from the early stages. Founders who fail to consider future exit possibilities early on may find themselves locked into unfavorable circumstances or beholden to investor priorities that do not align with their vision.
2. Common Exit Strategies
Each startup is unique, and the best exit strategy depends on factors like industry trends, market conditions, company stage, and strategic goals. Below are the most common exit routes. Many companies use hybrid approaches, combining multiple options as they grow.
2.1 Mergers & Acquisitions (M&A)
What it is: A larger company acquires a startup, typically for its technology, intellectual property, customer base, or talent.
Why investors like it: M&A deals can provide immediate liquidity and may result in a higher valuation if the startup is seen as strategically valuable. In biotech, they also allow big pharma and established biotechs to integrate breakthrough science and diversify their product portfolios.
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2.2 Initial Public Offering (IPO)
What it is: The company goes public, selling shares to outside investors on a stock exchange.
Why investors like it: An IPO can generate significant returns if market demand is high.
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Some biotech startups also go public through a reverse merger or a SPAC (Special Purpose Acquisition Company), where they merge with an existing public company instead of following the traditional IPO route. This method has been used by biotechs looking for a faster or less capital-intensive way to access public markets.
2.3 Strategic Sale
What it is: The startup is sold to a company that benefits from integrating its product, technology, or team. Unlike M&A, this type of sale focuses on long-term value and synergy rather than just financial transactions. In biotech, strategic sales often involve big pharma acquiring startups to strengthen their pipelines. However, smaller biotech startups also engage in trade sales—acquiring other startups to expand their assets or consolidate expertise before larger exits (e.g., M&A or IPO).
Why investors like it: A strategic sale often maximizes value because the buyer may be willing to pay a premium for strategic advantages. For biotech startups, a strategic sale might also be driven by a buyer's need to complement their existing clinical programs or accelerate product development through synergistic expertise.
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2.4 Licensing Deals
What it is: The startup licenses its intellectual property product, brand, or technology to a larger company, earning royalties over time. In biotech, licensing deals are frequently tied to milestone achievements. This means that in addition to upfront payments and royalties, significant sums may be secured when key regulatory or clinical milestones are met, helping to recover R&D expenditures and mitigate development risk.
Why investors like it: It allows investors to benefit from continuous revenue streams without requiring a full sale.
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2.5 Secondary Sale
What it is: Investors sell their shares to another private investor rather than waiting for a full company exit.
Why investors like it: This provides early liquidity without requiring an IPO or acquisition.
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This option is particularly attractive in biotech, where early returns can help offset the long timings often associated with drug development and regulatory clearance.
2.6 Acqui-Hires
What it is: A larger company acquires a startup primarily for its talent rather than its assets. More prevalent in tech, acqui-hires in biotech usually happen when a larger company is primarily interested in accessing the startup's research or specific scientific expertise rather than its technology or assets.
Why investors like it: This strategy can retain key employees and provide immediate access to new talent, skills, and resources.
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2.7 Management Buyout (MBO)
What it is: The existing management team buys the business from its current owners. Instead of selling to an outside buyer, the people who already run the company—such as executives or senior managers—become the new owners. However, given the substantial capital required for clinical trials and regulatory work in biotech, MBOs may sometimes require external financing or creative deal structures to succeed.
Why investors like it: MBOs offer continuity and alignment of interests, ensuring that the management team can drive growth and profitability.
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3. Who Decides?
The decision on an exit strategy for a startup is a collaborative process involving multiple stakeholders—each bringing their unique incentives, levels of influence, and decision-making power to the table. It is essential for founders to understand that while they may have started the company, they often do not have control over how or when an exit occurs.
3.1 The Players Involved
- •Founders – They may have started the company, but unless they own 100% of it (which is rare in funded startups), their preferences are just one part of the equation. Some founders dream of an IPO, while others prefer an acquisition for a faster cash-out. Employee compensation and equity stakes also factor into exits, especially when stock options are involved.
- •Investors (VCs, Angel Investors, Private Equity) – If investors hold significant equity, they heavily influence the decision because they are ultimately looking for the best return on their investment (ROI). Many VCs have timelines (typically 5-10 years) within which they expect an exit, a crucial factor discussed in our funding strategies guide. If a founder wants to keep running the business indefinitely while investors want their money back, tension arises.
- •Board of Directors – In venture-backed startups, the board plays a decisive role. If the company receives acquisition interest or is considering an IPO, the board must approve the decision. A typical board often consists of a mix of founders, investors, and independent directors, often leading to competing priorities between long-term company vision and short-term financial returns.
- •Scientific Advisors/Clinicians – In biotech startups, expert scientific advisors often provide input on product viability and market readiness, adding another layer of insight to exit planning. Their perspective is particularly important in determining whether the company is scientifically and commercially ready for a high value exit.
- •Key Employees & Management – In cases like MBOs or acqui-hires, the leadership team plays a critical role in the transition. If the management isn't on board with the exit strategy, transitioning ownership can be complicated.
At the end of the day, founders may have a vision, but they rarely have full control, especially in companies with external investors. Whether it's an IPO, acquisition, or MBO, the final call is often a negotiation (or, sometimes, a battle). Founders who understand investor objectives from the start can better navigate exit planning on their terms, rather than being pushed into a decision they don't want.
4. How Can Founders Protect Their Interests?
While every startup's exit journey is unique, founders must proactively safeguard their interests. The specifics of exit planning depend on factors such as company stage, funding, investor dynamics, and regulatory hurdles. Below are key strategies to retain control, align expectations, and avoid common exit pitfalls.
4.1 Key Strategies for Founders
- ❗Set expectations early on with investors regarding timing and preferred exit strategies to prevent future conflicts.
- ❗Maintain a high ownership stake whenever possible, as greater equity means stronger decision-making power.
- ❗Negotiate shareholder agreements carefully to avoid clauses that force early or unfavorable exits.
- ❗Incorporate protective provisions such as:
- •Drag-along/tag-along rights to control forced exits.
- •Anti-dilution clauses to protect equity from excessive investor influence.
- •Voting rights to preserve decision-making authority.
4.2 Avoiding Common Pitfalls in Exit Planning
Many founders lose leverage in exit negotiations due to these key mistakes:
- •Overestimating the likelihood of an IPO: very few startups go public.
- •Failing to align exit expectations early can create conflicts with investors.
- •Holding out for an unrealistic valuation: delaying a deal too long can result in missing an optimal exit window.
- •Ignoring regulatory risks that could delay an exit.
4.3 Industry-Specific Considerations for Biotech Founders
- •Structure agreements around biotech timelines: exit clauses should allow flexibility for clinical trial delays and regulatory approvals to prevent premature investor-driven exits.
- •Leverage milestone-based exits: Tie liquidity events to key R&D or regulatory achievements to enhance company attractiveness and demonstrate investor progress.
- •Educate investors on biotech cycles: Not all investors fully understand the long timelines and risk factors in biotech. Proactively setting expectations helps prevent friction later.
A well-planned exit strategy isn't just about maximizing valuation—it's about maintaining control, aligning stakeholder interests, and adapting to industry-specific challenges. Founders who take a strategic approach will be better positioned to achieve a successful and well-timed exit on their own terms.
5. Key Considerations for Founders
To successfully attract investors while also maintaining control over their long-term path, founders should proactively plan for an eventual exit:
- 🔹Timing: The right exit moment depends on market conditions, financial health, regulatory milestones, and clinical progress. These factors directly impact valuation and deal terms.
- 🔹Stakeholder alignment: Equity distribution, stock options, and shareholder voting agreements must be structured to minimize conflict at exit time.
- 🔹Industry norms: Certain industries tend to favor M&A (biotech, fintech), while others target IPOs (SaaS, deep tech).
- 🔹Building for exit: Even if an exit is years away, continuously structure your company to appeal to future buyers or public investors. Emphasize scalability, profitability, competitive differentiation, and achievement of essential clinical or regulatory milestones.
- 🔹Exit Strategy Lifecycle: Recognize that exit paths differ depending on your startup's maturity. Secondary sales or licensing deals may be viable early on, while IPOs and full acquisitions usually require advanced clinical validation or commercial traction.
Final Thoughts
Exiting a business without a pre-defined plan can be stressful and costly. The best way to ensure a lasting legacy, optimal profit, and a smooth transition is to plan the exit ahead of time. Given the unpredictable nature of drug development and regulatory decisions in biotech, founders should plan ahead and remain adaptable to ensure a profitable and smooth transition.
📌 Actionable Steps for Founders:
- •Clarify your goals: What do you want from an exit?
- •Evaluate multiple exit paths: Don't assume IPO or acquisition is the only way forward; consider licensing, secondary sales, or management buyouts.
- •Align early with stakeholders: Investors, board members, and key employees all play critical roles in an exit. Keeping expectations aligned avoids last-minute conflicts.
- •Stay flexible but proactive: Market conditions shift, and a good founder adapts to opportunities while staying focused on long-term objectives.
At the end of the day, the best exits don't usually happen by chance, they happen by design. Founders who take a strategic and informed approach will maximize returns, minimize friction, and retain control over their company's future.
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