Why Exit Strategy Matters
There are founders who start their startups for the sole purpose of exiting them. This group of founders mainly views building businesses as a means to an end; a tool to achieve a financial return. This exit-oriented approach is a more opportunistic way of doing venture entrepreneurship.
However, most founders don’t naturally think of exits when starting out. Founders, especially first-time founders, in general, are an idealistic bunch. They are more motivated by the prospect of building a breakthrough idea than finessing their way toward a financial exit. One reason is that having awareness where exit comes from sometimes requires a particular set of understanding about the industry’s inner workings and experience. Another reason could be that venture entrepreneurship is often romanticized to an extent. There is something romantic about realizing a world-changing idea with less regards to financial gain. In that regards, a more opportunistic approach is deemed by the idealists as less visionary at times. Some successful founders, such as Mark Zuckerberg, indeed started out from this more idealistic end of the spectrum.
The Right Mindset
The downside of the idealistic approach is that founders too often pursue venture entrepreneurship without being fully and rationally aware of what’s ahead. It takes a lot of luck to be very successful in venture entrepreneurship. To get lucky, founders need to take risks. Failure is the byproduct of not knowing one’s own capacities and willingness to take the right risk. Mark Zuckerberg’s case is a story from the top one per cent. He took not only the right risk but also executed his idea at the right time. In most cases, no one really knows when the right time is. That’s the luck part of the equation. By starting out without having this understanding, founders would end up adopting the “too big to fail” mindset too immediately, which leads to a significant increase in their chance for failures right from the start.
Venture entrepreneurship is a high-risk game, but it has two extreme forms. It’s a daring thing to aim for a $1 billion IPO in 10 years, while it’s also a foolish thing to forgo the chance of getting acquired for $1 million in one year. Achieving the former means risking it all to be the top one per cent of all startups, while the latter is closer to being the top 10 per cent.
The big question is how founders can strike the balance to earn the right rewards while taking the right risk. The key takeaway here is that the absence of exit considerations is often more harmful than helpful in achieving a vision. Venture entrepreneurship could be a long journey. A $1 billion startup isn’t built in one or two years. A long journey requires thoughtful preparation and a willingness to adapt. Things will change along the path to $1 billion. This is why being exit-oriented approach doesn’t mean being less visionary.
More idealistic founders should view the exit strategy as some sort of safety net. For more opportunistic founders, exit strategy sets the direction for their startups from day one. Either way, proper exit strategies along the path provides options that don’t need to be exercised, yet they are there as checkpoints.