I've sat through hundreds of presentations listening to startups try to convince a group of investors to invest in their company. It seems as if the same coach has instructed them to come up with an exit strategy slide. At least they all sound the same to me:
Our exit is to either get acquired by a large corporation or to go IPO.
We think Google or Apple or Microsoft is the most likely buyer and that they will pay a premium. They will rather buy us than build it themselves because we will have a 15 month head start on this technology.
When we are bought--and we think it will be within the next three to five years--we believe you will make you a 10X return on your investment.
Music to an investor's ears, right? Maybe not.
Apart from the fact that no worthy investor believes any of this crap, having an exit strategy too soon may actually be counterproductive.
Here are five reasons why:
1. It's naive
You have no better chance of getting acquired because you have an exit strategy than if you don't--at least early on.
You get acquired because you are creating value for customers, beating bigger corporations for desirable sales contracts, offering better products and services, capturing market share, establishing premium pricing, getting buzz in the market rags, assembling a killer engineering team, and so forth.
None of this has a whit to do with your exit strategy.
2. It distracts
It gets you thinking like an investor instead of an entrepreneur. I've never met a successful entrepreneur who is driven mostly by money.
A big payday simply isn't enough to get you through the long days and longer nights of building your company.
Changing the world? Yes. Beating the big boys with my little startup? Yes. Making a difference in the lives of my employees? Yes. Seeing hundreds of companies and thousands of people benefitting from my innovation? Yes.
Making a lot of money may motivate some investors, but it is a desired byproduct for the most ardent and successful entrepreneurs.
3. It demotivates employees
They love the culture you have built. They are committed to high levels of product innovation and customer service. Rhey love being David slaying the Goliaths, they enjoy coming to work, and may even work for less with you than a big corporation.
What does it do to their performance and commitment if they believe it can all be taken away from them some day? That they'll be stuck in a corporate cube farm where they make no difference, they'll report to a jerk, and they can be replaced at the whim of some fearful middle manager?
Every employee needs to know that an exit is possible someday, of course, but it's not your number one priority.
4. It leads to bad decisions
You start to make decisions for the wrong reasons.
Not to serve the customer better, not to build a strong company that adds value, not to build a great company with a positive culture for your employees, but to serve some personal and often selfish objective for you and your investors.
In other words, you have your eye on the wrong ball.
5. It sets you up
You begin to think that your investors only want a big payday.
You begin to resent them and direct negative feelings toward them without cause. You see them as a necessary evil instead of the partner they can and most often want to be.
The best investors know they will never make a penny off you if you don't build a viable company, no matter how elegant your exit strategy is. And here's another thing: Sometimes investors don't want to exit from your company--at least not just yet.
If you're a hot company, where else are they going to put their money that will return as much value as your fast-rising, market share gobbling, shooting toward number One or Two in the category company? Don't pit yourself against your investors unnecessarily.
There's a case to be made to have an exit strategy. Just don't put too much stock in it.