Why Entrepreneurs Never Plan to Exit Their Startups
Two common arguments and what I think about them.
“What’s your exit strategy?”
…said every investor ever, during a startup pitch.
Yet, when I speak with entrepreneurs, they’re discouraged from thinking about an exit. So I pried into this dichotomy. The real concerns, it turns out, stem from the challenges entrepreneurs face in understanding what it takes to get to an exit.
Frankly, many investors don’t know either.
An exit event is when you sell your company or go IPO (sell a lot of your company’s shares to the public). It’s called an exit because your company (or at least a majority of it) is technically no longer yours when you sell it. A successful exit means you make a profit off that sale.
Because an exit is such a rare event and, in rarer cases, a recurring event for startup entrepreneurs, their resistance takes the form of two ethical arguments:
- The personal
- The economic
Let’s break these down.
“Why start a company only to throw away your hard work?”
The argument here is to say there’s a lot more value in building toward your vision than selling your company; that selling your company means selling out.
This assumes the entrepreneur has the will and capacity to build toward her vision at all.
Addressing the Personal Argument
It’s important for us to respect that people start businesses for different reasons. From a high level, these businesses fit into three categories.
- A lifetime business is one you establish to pass down the generations. Think of your grandmother’s house that everyone still visits.
- A lifestyle business is one you sustain for the benefit of short to medium-term cash flow. Think of it as an investment property.
- A sellable business is one you scale to be bought. Think of this as flipping houses, whereby you build the value of the property for a specific buyer.
A lot of times you can’t move fast enough toward a big vision while trying to grow your business. You may not be able to scale it fast enough to keep up with market shifts. But a huge company, which hopefully shares your vision, can with all its resources and reach.
So, if you want to exit, are you deliberately planning to?
Armando Biondi gives us a glimpse of that process with the anatomy of an M&A for startups.
“Don’t you just end up feeding the alphas of the food chain?”
The argument here is to say big companies monopolize and affect economies at a global scale. Why feed that kind of power?
This assumes big companies have oppressive agendas that prevent small entrepreneurs (and even nations) from acquiring wealth.
Addressing the Economic Argument
I agree. We have to shake money loose from the top of the totem pole, but we can’t do that by pointing fingers from the bottom.
Less than 1% of startups receive funding, and less than 1% of those that successfully do so raise additional funding to scale. The problem isn’t whether you’re lining the pockets of the big guys.
The real problem is not enough big guys are funding the little guys.
The little guys have an inherent condition. They desperately want to improve the world. And the majority of those entrepreneurs who acquire wealth from successful exits give back and pay it forward.
People like my friend
Jenny Fielding of Techstars go back to the basics and invest in startups that are “all about health, wealth, and happiness.”
As I built my businesses, I realized the only way to pursue my larger vision was to allow better-resourced companies to help. Allowing the right strategic partners to buy into my companies showed me how much they aligned with my values.
I feel the same passion for ensuring wealth distribution at a global scale. And at one point, I posed the same ethical and economic questions as many others.
It’s just that now I believe I can maintain that entrepreneurial condition of wanting to eradicate things like poverty and mental health diseases without putting myself through them.