An Exit Strategy is Not a Business Strategy

Sizzle It founder Scott Gerber says too many young entrepreneurs focus on potential exits, when they should be focused on getting started.

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I'm seeing this sort of pitch a lot lately:

"We are the next such-and-such company" or "we take such-and-such company concept to the next level" or "unlike [insert billion dollar website name here], we have added a killer feature and thing-a-ma-jig that changes the game."

Fill in the blanks with the buzz words of the moment and I'm sure you'll get the idea. Why the sudden urge to jump into certain markets rather than others? Well, call me crazy, but for many an amateur, I believe it might have to do something with dollar signs in the press. (Let's just say $50 billion for the sake of example.)

What disturbs me about this trend is the sheer number of people that are concentrating on web companies built for "investment dollars" or "ad revenue" rather than built for immediate income-generation. Sure, Web start-ups are inexpensive to launch, but I still contend that to stay in business they must earn money. Not every website is going to get an investor onboard or a strategic acquirer interested—not by a long shot—and you have to at least afford Ramen noodles to sustain yourself. 

When I partnered with a fledging start-up to help build a Web 2.0 company back in the early 2000s, I quickly fell victim to a lot of this same hype nonsense. Except at that time, it wasn't "social networking", it was video sharing. YouTube had just started to come about and I wanted in the game. Like every other Web start-up in that space at the time, we too were "revolutionary" and a "game-changer."

Only problem: we had no immediate revenue model, based our financial forecasts totally on sponsor and ad revenue, and could not keep up with the site traffic. Investors wouldn't touch us because we were still too small, yet expenses kept piling up. In the end, the company folded and tons of money was lost (and probably is still being paid off the original founders' credit cards today.)  

I certainly don't want to discourage the brilliant Web engineers out there whose business models are sound; however, I do want to discourage the other people out there (yes, you know who you are) from jumping on the "$900 million bandwagon" simply because you think your idea is better, cooler, or has more features than a site that already exists. In fact, if you have the word revolutionary in your pitch, just go ahead and wipe hard-drive clean right now. 

Think before you code. Just because you can build something, doesn't mean you should. Time is your most valuable asset and you want to make sure that the enterprise you are committing yourself to has a real chance of providing you with sustainable revenue. You must truly understand how your business will make real money before you bank on some unrealistic expectations concerning traffic. If you are making money, the potential to raise investment dollars becomes all the more real. 

Remember, it is never a smart bet to try to build an "acquisition" rather than build a business. After all, if your business cannot survive on it's own you'll need to exit the company way before any exit strategy can even occur—because you'll be bankrupt. 

Scott Gerber is the founder of the Young Entrepreneur Council and co-founder of Gen Y Capital Partners. He is a serial entrepreneur, TV commentator, and author of the book Never Get a "Real" Job. @askgerber