III.How do startups end?
Startups don’t last forever. Startups are not really companies at all, they are only precursors to a company. In particular, early-stage startups are more like a series of experiments or tests that, if successful, lead to a successful business.
If a startup is successful, it may end up getting to an exit – realizing the time invested in the startup and capital growth through an acquisition, merger or public listing. If a startup does not fly, its path may end when it’s shut down or even goes bankrupt. In some rare cases, a startup may also grow into a normal stable business. However, the most common endpoints in a startup's life cycle are exit and company shutdown.
When a startup stops
A startup's cash reserves determine the length of its runway. “Runway” here means the lifetime that a startup has left. Basically, it’s calculated as all the assets of the company divided by monthly costs, which gives you the number of months a startup has before the money runs out. If the runway ends, so does the startup story. Of course, there are many ways you can still try to keep a company alive. Perhaps there is still an investor who believes in it. Perhaps a bank will lend some money, especially if the founders have their own finances in order. If the company has no debts and other liabilities, its expenses can be cut down and the company can in principle be kept up for years as a kind of "zombie company". But if the startup doesn’t eventually get off the ground, at some point it will meet the end of the runway.
Liquidation and bankruptcy
If a startup has no cash flow, previous cash has been used up, and no new funding is secured, it's time to wind the company down. There are two ways to do this in practice (the following is how it works in Finland, but the procedure is largely the same elsewhere). If the company has no debt, a limited liability company can be shut down through a liquidation procedure. The liquidation process takes at least six months, but depending on the size of the business and the ownership of the company, it can take longer. Then, when clearing is done, names are signed and the company wrapped up. If there are no malpractice claims, the founders can move on with their lives.
However, if the company has creditors and they sue, things get more complicated. If the company's assets are insufficient to pay the debts, the creditor or the debtor may apply to the court for bankruptcy. This will look at the firm's assets and liabilities and determine the order in which they are settled. At this point, many creditors are prepared to negotiate a lower debt burden, especially if the alternative is that there is nothing left for them.
If all the debts are honored, it may be possible to try to continue the business. But if the company is unable to pay its debts or fails to reach an agreement with its creditors, it may result in the termination of business.
Bankruptcy can have a variety of consequences for a startup’s management, founders and board of directors. If the company has done its job well and operates properly during the liquidation process, the penalties may not be significant for the individual. If, on the other hand, the founders or management have guaranteed for example bank loans, then the debts will fall due to the individuals after the business is shut down.
Contrary to popular belief, bankruptcy is not necessarily the end of the entrepreneur's personal economy. Especially if the proceedings are handled well and there are no reckless personal loans in the name of the entrepreneur or the management of the company, it’s quite possible that the entrepreneur will be able to continue their life normally after the company crashes.
Becoming a small company
A startup can also cease to be a startup by consolidating its operations so that it generates a decent turnover year after year, but no longer seeks explosive growth – changing from a startup to a small company. Although it is not an explosion of mega-success, such stabilized firms can be considered successful as they can generate steady revenue and enable its founders and employees to make a living, even though the dream of exit may never be realized
However, such a situation is rarely possible for startups that have venture capitalist backing. For venture capitalists, a situation where a firm stabilizes is a failed investment. For this reason, such a bridge from startup to SME is typically possible only if the firm does not include investors whose definition of success is at least a tenfold increase in investment.
Exit and IPO
Exit refers to a situation where the value of a startup is raised to such an extent that it is either sold off, bought by a new majority owner, or the company goes public. Exit, then, means a situation in which startup founders and investors realize their holdings, either substantially or completely.
Exit can happen in many ways. The most typical exit situations are when another company buys a startup, or at least a majority of its shares, or when a startup is listed on a stock exchange. A "unicorn" is a private startup that is valued at over $1 billion.
Finnish startup success stories include MySQL, which was sold to Sun Microsystems for $1 billion in 2008, Rovio, which was listed on the stock exchange in 2017 for $1 billion, and, of course, Supercell, whose majority was first sold to Japanese Softbank in 2013 for over $1.5 billion and then again 2016 to Chinese Tencent at a price that raised Supercell's value to a staggering $ 10 billion, making it Europe's only “decacorn”.
Smaller Finnish exits include Jaiku, which was acquired by Google in 2007, Beddit, which was sold to Apple in 2017, and Idean, which was bought by Cap Gemini in 2017.
Listing on a stock exchange generally requires that the company has significant profitable turnover and is able to demonstrate growth potential. What matters most to a stock market buyer is that the value of the firm next year is more than buying the stock – and that the firm makes enough profit to pay hefty dividends. For example, a company can grow by expanding its customer base, expanding its offering, expanding the areas where its products or services are being offered, or through acquisitions.
The reasons for an acquisition are often more diverse. A bigger company might be interested in buying a startup because of its business potential. Or they want to integrate the startup’s product or service into their own operations. In addition to the product, the buyer may also be interested in the technology developed by the startup. The customer base of the company may also be of interest to the buyer. Sometimes a larger company can also grab a rival startup from the market, especially if the startup is starting to threaten its market position.
A fairly common reason for smaller exits is also the acquisition of startup talent by a company – the so-called “aquihire” (acquisition + hire) situation. Hiring top experts is one of the key challenges for any company. If the buying company has identified the startup skills they need for their own operations in an existing team, and has calculated that buying a startup is cheaper than hunting similar skills on the free market, it may be profitable to pay the company a few million to bring its experts into their camp.
Sign up to solve exercises:
Sign up to solve exercises:
IV. ConclusionStart →
Kiuas is one of the leading startup accelerators in the Nordics, bringing early-stage startups together and providing them with the best support and tools to take their progress to the next level.
Maki.vc is an early stage venture capital firm dedicated to partnering with founders who never conform to category standards.
AVP is the entrepreneurship education program at Aalto University. Students in multidisciplinary teams do hands-on exercises and gain tools, ready to be used to construct a startup or to renovate an existing company. We teach students to build like an entrepreneur.
Reaktor Education partners with world-class organisations and education providers to develop online courses and digital learning solutions designed to empower all people to participate in a rapidly-evolving globalised society.