Exit Strategy

IPO. M&A. Sure, that's what on the exit strategy slide in your PowerPoint. But, I believe (and this has been reinforced by experience - mine and others), the founder/entrepreneur needs one too and it has to be figured out before taking the plunge to do the startup.

Recently I was chatting over lunch with a fellow entrepreneur whose startup is on its third year (that's another thing that every entrepreneur should have - a non-competing friend or two to share startup travails with). Their product's got customers and revenue, but, the seed money has run out and the revenue is not big enough yet to cover payroll fully, though it covers operations. They're busy trying to keep the company running while knocking on doors for funding, but unfortunately, they've not met with success. (IMHO, it's because they can't get investors dreaming of $100 Mill in 5 years, but seriously, so few startups actually reach that somewhat arbitrary goal.) The founder CEO is beginning to sport a furrowed brow - lack of income doesn't make for a fun or sustainable lifestyle for most of us - but is still passionate and dedicated and would hate to give up on the company.

That's when I suggested that she needs an exit strategy, and when she started talking about selling, I cut in with 'an exit strategy for you'. The funny thing is that everyone goes in assuming they have one. It's always I'll go back to the corporate world, or sell the IP if my company doesn't make it in two years. But the problem is that 'doesn't make it' is not always a clear-cut condition. You could be running on fumes, stuck for months in a due diligence delusion where the term sheet is always a week away. You could have customers sign MOUs but not convert into POs because their waiting for an internal reorg to be completed, but the dust never seems to settle. Or you've got customers and revenue enough to get by and you know you'd take off if you could just spend a tad bit more on marketing - except you dont' have that tad. So you hang in there, and continue hanging, drifting wearily as the weeks go by.

That's why you need something very specific which triggers the exit. Something like ' if I haven't had a paycheck or made more than $X in a year or 15 months (or whatever your personal threshold is)'. Or, maybe you don't want to be on a slow train and will not stick around if the company's growth is feeble. Once you've got your trigger figured out, then you can figure out what you will do - sell, shut down, walk away and let the co-founder run it, put it on ice for reviving when the market's better, whatever. Actually, an exit strategy is good if you're a startup employee too - how long would you be willing to work for reduced pay. Or you could be making a decent salary but feel the company, or your own prospects, are stuck in neutral or slipping into reverse.

This is worth writing down and saving for reading when things are not going well. It may remind you of your plans to step away - or convince you things are not quite as bad yet. Either way it will clarify your thinking, and get you going which is a good thing - startup limbo is a depressing place to be in for long.

One more thing: for an entrepreneur, planning to recognize failure and how to exit (notice 'exit', not 'handle') in that case is just about the hardest thing to do, especially when you're bursting with enthusiasm for the great idea that you're just launching. But, it's worse if you try to do it after the fact, since as an entrepreneur, you're hard-wired to believe in success. The trick is to consider it part of the business plan, your personal one, that you should build before you do the one for your startup. Then you'll be all set to look before, and after, you leap.