May 22, 2009

No Exit: Why Exit Strategies are Bad for Business

by Freddy J. Nager, Founder of Atomic Tango & Entrepreneurial Advisor

Too many entrepreneurs treat their start-ups like Hollywood relationships: the affair begins with a lot of passion, is great for headlines, and might even lead to deals, but as soon as things get a little rocky — or something better comes along — the entrepreneur is outta there.

These zero-commitment capitalists proudly call themselves “serial entrepreneurs,” which, in relationship terms, would make them philandering sluts. But hey, whatever consenting adults want to do with their time and money is fine with me…

But is it good for business?

An integral part of a formal written business plan is the “exit strategy,” which describes how the entrepreneur intends to unload her business in five to ten years. Common options include taking the company public on the stock market, or selling the business to another investor or company. Even if your desire is to have a business you can run for life, it’s difficult to score financing for your start-up if you don’t cite an exit strategy, so you do what you gotta do to appease the finance gods. (Though considering what’s happened on Wall Street over the past few years, should we still be doing their bidding?)

After all, there’s no harm in saying you’ll pull an IPO or sell your company to Google in five years — right? Everyone knows that long-term projections in a business plan are nearly as fictitious as the existence of Dick Cheney’s soul.

The problem arises when a single-minded obsession with an exit strategy overrides all commitment to building a profitable business. As depicted in Lemons 2.0: If Everything were Run like a Dotcom, many Silicon Valley entrepreneurs forgot the other part of their business plan called “the revenue model.” Some are so eager to flip their companies that they launch hyperventilating publicity campaigns even before their products are out of beta.

From Feast to Famine…

You can’t really blame them. These entrepreneurs all salivated like pitbulls in a sausage factory when Google blew $1.65 billion on YouTube before the video site even turned a profit, or when eBay’s Meg Whitman squandered $2.6 billion on Skype. Consequently, hundreds of start-ups launched with no realistic revenue model but, rather, an eye on having some mega-corporation snap them up.

Then the recession struck all this corporate matrimony like cold water tossed on copulating hounds, and some of those mega-corps started looking for saviors of their own. Yahooooops.

At the same time, the stock market became as nourishing as a buffet at the Karen Carpenter Bistro.

Consequently, many of those exit-oriented start-ups have suddenly become bottom-ups, landing in the TechCrunch Deadpool, with most people not knowing they ever existed.

The Other Way to Approach Business…

Compare that to SRC Holdings, an American manufacturing conglomerate that emphasizes profitability, thinking through all contingencies, and never laying a single employee off. They’re doing just fine in this recession. The Inc. magazine interview with SRC CEO Jack Stack is a must-read for entrepreneurs who are serious about running a business. You won’t find any obsession with exit strategies here — indeed, the company remains privately held after 26 years, with ownership firmly in the hands of its employees.

So should you have an exit strategy? Yes, if you plan to invade a Middle Eastern country or enter a PhD program. But if you’re an entrepreneur, consider these links that Wikipedia provides for “Exit Strategy”:

Iraq Study Group Report
Pyrrhic victory
No-win situation
Total U.S. Withdrawal in the Vietnam War

Not inspiring, huh?

So, yes, absolutely put an exit strategy in your business plan to appease the banker and the VC, but before you even buy your first Aeron chair, be sure you also engrave these words into the wall of your spanking new office:

“To have and to hold,
from this day forward,
for better for worse,
for richer for poorer,
in sickness and in health,
to love and to cherish,
till death do us part.”

Keep repeating them to yourself and to all your partners and employees. That’s how you should think about your start-up. That is, until something better comes along…

Related Articles:

Shameless plug: Need professional consultation on your business strategies? Contact Atomic Tango

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Freddy is the Founder & Creative Strategist of Atomic Tango. He also teaches at the University of Southern California (go Trojans!), shoots pool somewhat adequately, and herds cats. Freddy received his BA from Harvard and his MBA from USC.

4 Responses

  1. Should you have an exit strategy for a particular market? As tech changes so does the market place but we see behemoth’s like the music & movie industries, the yellow pages and car manufacturers still hanging on to what used to work. I think commitment is key but knowing when to call it quits and move on seems to be tough too.

    Freddy’s Comment: Good point, though I was addressing start-ups, not established companies. Check out that Inc magazine article I referenced in my post, since it’s a good response to your question. And as I mentioned in my earlier post on Marketing Myopia, the key is for firms to evolve, not look for the exit door.

  2. Such a good timing on this article. It made me wonder if it was correlated to the short exit strategy section in our business plan and what we had decided to do from here on.

    Freddy, always a pleasure to read your posts. Keep them coming!

  3. Exit strategy isn’t a dirty phrase! And it isn’t just for the few entrepreneurial types you cite.

    Exit strategies aren’t there for the VC’s and the bankers, they are there for the owner! Every business owner needs a succession plan to provide for the orderly transfer of the business in case s/he walks in front of a truck, has a stroke, wants to retire, desires to give the business to the kids, etc.

    Your statistics are informative and useful. Your condemnation, on the other hand, cites an abuse that afflicts only a small portion of the millions of businesses out there.

    The exit strategy is a significant part of succession planning, which is all about creating LEGACY, preserving/growing the LIQUIDITY needed to maintain lifestyle “after work,” and LETTING GO, since none of us goes on forever.

    Freddy’s Comment: We’re talking about two completely different things here: an “exit strategy” in a start-up business plan is NOT a “succession plan.” Indeed, any entrepreneur under 60 would look incredibly naive to be discussing what should happen in case of his death in a document prepared for VC’s.

    This article primarily refers to Silicon Valley entrepreneurs, many of them young and hardly thinking about death or even a legacy. Are they planning to leave their enterprise to their kids? Yeah, right. What kids? Most are thinking about how to cash in ASAP and move onto the next project. That results in companies so poorly structured that they have shorter lifespans than gerbils. These businesses are so flimsy, there would be nothing to leave behind in case the entrepreneur stepped in front of a bus. It’s not the mortality of the entrepreneurs that’s at issue here; it’s the life expectancy of their ventures.

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