Let’s pull a question from the MBA bin. I’ve spoken a few times to MBA schools that have mistakenly invited me in to talk about starting and running companies, and the question I always get at these events is “what is your exit strategy?”
I don’t think you can be very successful, and you certainly won’t be happy, if you are running a business and thinking about your exit strategy. If there is one theme that I hope I am conveying here over the course of many posts, it’s that you can’t predict what is going to happen to your company.
My cofounders and I have never entered a business or market thinking “the goal is to take this company public” or “we need to get this in front of the M&A team over at Toys ‘R Us”, or “if we have 50% of the online humidifier market by june 09, we’ll be a great acquisition target”, nor do I think you can unilaterally pursue exit goals successfully. The old adage “great companies are bought, not sold” is sometimes taken to mean that if you’re out there hawking your wares to M&A teams, your product/service must be second rate, but I think the more salient takeaway from this adage is that great companies are pretty focused on what they need to do in order to grow the business, execute on the strategy, and hit the revenue/operations targets.
The bottom line is that you have to take something of a zen approach to what the “result” of your company will be. Your business will either be successful or it won’t. If it’s successful, then the outcome will take care of itself. How will it take care of itself? It’s impossible to predict.
The enlightened reader is now thinking, “wait a minute, if you don’t have an exit strategy or outcome in your head, then how do you know how to finance the company? How do you decide what you want to do next in terms of growth? How do you decide if an offer (financing or acquisition or otherwise) is worth it?" Around this same point in the conversation at the MBA events, I usually get a raised eyebrow that accompanies the comment “well, your VC’s are certainly thinking about exits even if you’re not, so how can you say you’re not thinking about an exit strategy if 60% of your company is owned by people who want a fast exit”.
I have generally the same answer to both questions/comments. First of all, contrary to what I seem to read almost weekly, technology VC’s (at least the early stage folks we’ve worked with) are more interested in growing successful businesses by financing them and less interested in figuring out how to get liquid within 18 months. Obviously, there comes a point or many points in the life of a successful company in which there are liquidity options, including acquisitions, mergers, and public offerings. I can tell you that if you are running a growing company with solid investors, those investors will generally be encouraging you to keep growing the business and financing it for further growth and ignore everything else. At some point, the preferred financing is a public offering through which the investors have some ability to approach liquidity. So, the notion that you are on the speed clock to exit when you raise venture money just isn’t generally true. No doubt there are exceptions – say a fund is underwater, and you’re the last company in the portfolio and you’re doing 8 figures a year top line in your third year and you want to stay private as long as possible – ok, you're definitely going to have a fidgety investor on your hands. From the entrepreneur’s standpoint, the answer to the question,“If you don’t have an exit strategy, how do you know how to finance the company? How do you know where you’re going?” is similar. You treat any acquisition/merger/etc. entreaties as financing offers, realizing that financings that result in 100% acquisition of the equity are going to look different than those involving the purchase of 10% of preferred Series D stock. Since you should always have a general sense of how your company would be valued on a financing, you can then more easily react to other offers pretty quickly, without having to run around like a chicken with its head cut off. They either make sense vis-à-vis how you would finance the continued growth of the company based on your current trajectory or they don’t.
Don’t interpret my comments here as "never talk to your executive team about how much you think the company is worth right now" or “you don’t even talk to people that want to talk to you about financings, m&a, mergers, etc. until you are ready to finance the company for further growth”. That’s not at all what I’m saying, and in fact, I’d say the exact opposite. I almost always met with people that wanted to talk to us about these topics (almost always financings), even if we weren’t a stage where we needed to raise money. I’ll go into this more in a future post, but again, this is all part of our philosophy that you can’t try to steer your company down a pre-ordained path: “we’re not going to talk to VC’s now because our business plan has the A round lasting 12 months”, or “we’re not going to start talking to investors now because we’d really like to sell the company in six months”. Potential investors, potential acquirers, potential partners – these are all opportunities that you should weigh in the context of what’s happening to your business in this market. How these opportunities will play out is impossible to predict. Make a map of how you want to grow the business, not a map of what you want to happen to the company.