No matter how well you pick and nurture startups, it’s irrelevant if you can’t realise and maximise their value through a successful exit. Handing a portfolio company over to a new owner is the culmination of the investment lifecycle, converting the investment into cash, hopefully resulting in a profitable return for the VC firm, and the founders.

But achieving good exits isn’t easy, as many VCs are currently discovering, or rediscovering, in the current tough climate, with plummeting valuations, high-interest rates, and a limited pool of potential buyers. For many investors, this has given rise to cash flow concerns, as exits that would have happened are put on hold. It means re-evaluating exit strategies for a new landscape and looking to maximise value, as much and as soon as possible.

The last 12 months have taught investors a valuable lesson, which is that exit planning is a vital and continuous process, and getting it right is more art than science – with a fair dose of luck thrown in. Each company and exit scenario is different, depending on a variety of factors, including the economic environment, performance, and profile of the company, uniqueness, maturity of the investment fund, macroeconomic trends, alignment between shareholders, etc. It requires a strong instinct and nerve, plus plenty of hard work.

So, what should investors and founders be doing to maximise success and returns, particularly in the current unfavourable climate?

1. Align goals early

While not every business will have a formal exit plan in place, the earlier that founders and investors discuss and align goals the better, as this enables them to position and prepare the business effectively. With multiple stakeholders involved, there are multiple diverse interests to balance. Naturally, everyone wants to maximise returns, but other objectives may include securing the owners and shareholders within the deal, finding a ‘good home’ to continue the mission and ethos of the business, and looking after employees.

Investors have a vested interest as they are looking to generate a return on the money within a certain timeframe, and their investors (LPs) are expecting their money back with healthy interest. Similarly, founders typically have most of their wealth locked up in shares in the company and hence it is also their interest to crystalise some of this wealth.

The earlier these discussions happen, the more can be done to consider potential exit strategies, whether that is a public listing, sale to private equity, or an industrial trade sale. The best companies have an exit in the back of their mind from day one, enabling them to prepare the business for a smoother transition when the exit opportunity arises.

2. Get the timing right – easier said than done!

Of course, no exit plan can be set in stone and it’s important to keep scanning the market and sector landscape to assess how it could impact a potential exit. Timing is critical and in an ideal world, you should time your exit strategically to take advantage of market trends and favourable economic conditions (read 2021 not 2023!) As with any kind of investment, if you miss your window, it could be a long wait until the next one.

A big part of success therefore comes down to understanding trends and movements and having an instinct as to the right moment to move. A big mistake that some companies make is rushing to sell at the wrong time when the markets are negative towards a particular sector. Scenario planning can be helpful to envisage what could happen in different situations, i.e. what if the exit timing was delayed one, two, or three years. What impacts would that have on the business? What changes need to be made?

It’s also critical to be aware of potential obstacles, such as legal and regulatory hurdles, which could affect the feasibility or timing of certain exit strategies. Reviewing the exit landscape, goals and horizon should form part of board discussions and meetings. Ongoing communication is vital to ensure there is transparency and alignment, to optimise an exit.

3. Build strategic relationships

The likelihood of a successful exit is enhanced by expanding your circle of contacts in the sector you operate in and the world of finance so that you have ears in the right places about industry movements and potential buyers. Many founders have little or no knowledge about exit planning and could take guidance from their investors, advisers, bankers, non-execs, and shareholders, and proactively spend time networking and building relationships with potential acquirers, partners, and other “influencers”. Founders need to take this on as a key part of their role, supported by their investors.” It can also be worth hiring investment bankers to carry out a “strategic review” or to test the markets if there is a great deal of disagreement or uncertainty.

4. Maximise what you can control

Timing can be your best friend or your worst enemy, so in a tougher market, focus on what you can control by doubling down on building value. Sometimes the economy doesn’t work in your favor in terms of access to capital, customers, partners, or general sentiment, and the only option is to be more patient. This can also be an opportunity to drive solidity and quality, to build a better vintage. When capital is scarce, entrepreneurs must be more capital-efficient, and resilient and ‘survival of the fittest’ means winners will shine.

There are various strategies to increase a company’s value and attractiveness, including finding a path to profitability, boosting customer retention, launching new products or intellectual property, or investing in hype and PR around the brand. Sometimes it comes down to clearer differentiation, by developing a unique value proposition that sets the company apart in the market.

5. Foundations for a smooth exit

Businesses should also put certain foundations in place to reassure potential buyers, secure their valuation expectations, and avoid any hiccups when a buyer does come knocking. This could include strengthening the team or board with new hires or hiring a chairperson with experience in overseeing exits, who can lead on implementing governance structures, ensure all reporting is in place, the right metrics are being measured, the right positioning, etc.

Many founders go into an exit process unprepared for the scrutiny involved and this can impact exit value or cause delays. So, founders should always be thinking about their operations and processes with due diligence in mind, ensuring they are across all business and employee activities, including any HR issues, regulatory or product matters, or financial liabilities that could scupper a deal.

Timing > quality

Plenty of exit plans have been torn up in recent months, but VC is known as ‘patient capital’ for a reason. As VCs, we do our best to help founders build the best possible businesses, but few companies are immune to economic shifts. It is time to focus on the fundamentals and weather the storm until the timing is once again in our favour.

Originally posted on Forbes.