Since my last article in April issue on Launching your Startup, one of the companies Instagram mentioned in it has already been acquired for one billion dollars by Facebook. Now the question is how Instagram was able to accomplish it. Well, I am not dissecting all the reasons for Instagram's acquisition here. You can easily read them in various articles on internet. Here my focus is on few things for creating a sound exit strategy for your startup. Those, who have read, Stephen Covey's book, The Seven Habits of Highly Effective People, may recall that one of the habits is, "Begin with the end in mind". I really believe that habit is key for any entrepreneur. You may wonder why I am saying it. After all, startup is your dream, so why worry about an exit when you are just starting. It's going to be hugely successful, fun and profitable. Surprisingly, there are two real and practical reasons why you need an exit strategy. First, outside venture investors may want return on their investment and secondly, you may lose interest after company has reached a certain size. Here are my four key take away (4KTA) points on this topic based on my experiences.
1. Begin with the End in Mind –
Always begin with the end in mind and ask yourselves some hard questions. What is your ultimate goal here? What is your real motivation behind doing this startup? Is your long term goal with this company to make a huge difference in the world? Are you just trying to bring out a product that is not in the market today and sell the company to a larger vendor? Do you want to grow the company and then take it public? These questions should be answered before commencing your startup journey. It will help you create a road map and an execution plan. Remember that the time is relative in any business. I think of business ownership cycle in the form of a bell curve with various phases. These are startup, growth, slow growth, decline, and then decay phases. So ask yourself, what phase or phases of business cycle you enjoy the most. Is it the creative part of coming up with an idea and turning it into a product, then bringing it out to the market, or is it the part of growing it all the way to several million dollars revenue? By asking these questions early on, you can assess what you enjoy the most and love doing and accordingly, plan your exit or your company's exit strategy.
2. Plan of Execution –
With a clearly defined end goal in your mind, the next step is to develop an execution plan. This will consist of strategy, positioning and negotiation. The strategy will help you identify large vendors with a need and gap in their product portfolio. You then create a compelling story with differentiated value add and position your company. The negotiation part involves whether you and your Board would like to engage a third party mergers and acquisitions advisory firm to help with the execution plan or pursue directly. You need to absolutely make sure that you are in alignment with investors and Board on your plan.
3. Possible Outcomes –
There are typically three outcomes – selling your company, taking company public and closing the company. In first scenario, your startup is acquired by a larger company bringing possibly huge returns for shareholders depending upon timing, strategic value add and positioning in the market, and other factors relevant to both parties. The larger companies acquire for strategic reasons such as need to own the intellectual property, to fill a product gap due to being late to the market or in internal development, or to grow their revenue quickly. The other possible reason could be that they would like to prevent you from being acquired by a competitor. Nowadays, a number of private equity firms also buy out majority shareholders providing liquidity to founders and early investors and then put together an operational team to grow the company to take it public or sell to a larger company realizing return on their investment. The second scenario of initial public offering (IPO) used to be the preferred mode but since dot com burst and due to stringent financial regulations, the IPO rate has significantly declined. There are also significant expenses and liability concerns once company is public. Last situation and hopefully, you don’t get into that, is realizing that you need to make a hard decision with your Board to shut down, close and liquidate the company. It could be due to number of reasons such as company is running out of money, being early in the market, not getting much traction, product development taking longer than expected or competitors already selling similar products. I believe if you begin with a plan early on, are open minded, flexible and swift in adjusting your strategy as you develop your product and continue to gather market data from customer prospects, you could avoid the last option.
4. Be Happy! –
Planning for your exit strategy may sound counter intuitive when you are just starting. However, the reason for it is to plan how to optimize a good situation, rather than get out of a bad one. This helps you focus your and team's efforts on things that make it more appealing and compelling to your target acquirers. For instance, at Ukiah Software, we came to the conclusion that we should find a larger partner to sell our products. Hence, we started exploring partnership opportunities with possible vendors and sold the company to Novell. Once you have decided upon an outcome and executed it, congratulate yourself and your team and move on rather than thinking that you could have done better or sold to another vendor. Remember the grass always looks greener on other side. So be happy that it was the best decision that you and your Board made at that particular time in the life of your startup. Reflect upon lessons learned and make sure to use those lessons when you embark upon your next venture.