Startup 132: Why an Exit Strategy is a bad idea
My apologies that it has been so long since I’ve written but I’ve been a little busy the past year and a half. I started a new company called ZangZing which is building a new service to help groups share photos. You can sign up for the beta here. I am also on the board of 3 other companies – Lookout, Smartling, and ccLoop – and an adviser to a fourth – MobileIron.
Exit Strategies
I have been meaning to write about the question of “Exit Strategies” for many months.
Not only has there been lots of press about exit strategies with Groupon turning down a multi-billion dollar offer from Google, but in about 1 out of every 2 recruiting interviews, I am asked the same basic question, “What’s the company’s exit strategy?”.
Let me get right to the point. If you work for a company or meet with a startup CEO that says they have an exit strategy, then you should find the nearest exit. Think of a company with an exit strategy as your floor lighting that will illuminate and guide you to the nearest exit – which may be behind you. (OK, after flying almost 1.5 million miles, airplane humor is too easy).
Now some of you might be asking, “But Joseph, you sold a couple of companies. Why and how can you credibly you say that?”
Well, it’s simple. I don’t believe there really is such a thing as an exit strategy. And I have never had one for any of my companies. An exit strategy implies very short term thinking about how Google, or Facebook or some other deep pocketed, cash rich company is going to come along and scoop the company up. And that type of thinking is simply a bad idea. Check out the definition of exit strategy from Wikipedia:
An exit strategy is a means of escaping one’s current situation, typically an unfavorable situation. An organization or individual without an exit strategy may be in a quagmire. At worst, an exit strategy will save face; at best, an exit strategy will peg a withdrawal to the achievement of an objective worth more than the cost of continued involvement.
When you think of a startup, it’s probably not a good idea if the team is thinking about escape or saving face or withdrawal.
Instead of thinking about the exit, startup teams (and potential employees) need to be laser focused on a success strategy. This means thinking (and asking) about the 3-5 most important things that will make the company successful, e.g. Who do we need to hire? What products do we need to build? How do we grow our user base? How do we make money and become profitable?
A success strategy is about building value. And when you are successful and build value, then you will have lots of options including continuing to grow the company, selling the company, taking a company public, merging with another company and more.
So stay focused on your company’s long term success and along the way you will have lots of hard choices about if and when to “exit”. In writing this, it seems so obvious, yet I am continually amazed that so many people think and ask about exit strategies. Hopefully no one will ask about exit strategies in any future interviews and if they do, then I know they are not good at doing their homework. 
Leave a comment and let me know what you think.
And here is another post about strategy planing that you might appreciate. If you don’t know where you’re going, well, you’re lost.
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Exit sign courtesy of heathbrandon
Airplane exit sign courtesy of joeshlabotnik
Joseph, congrats on all of the new and exciting things going on in your life! This is a great post– I couldn’t agree more that the main questions are “Will users interact and engage?” “Will we make moolah with this engagement?” Love it! Thanks Joseph, Allison
Thanks Joseph for another insightful post. I’ve often thought the same thing, the exit strategy question seems to get a lot of weight in discussions with prospective investors and even senior team members. If you can craft an argument why Google, Facebook, Microsoft, etc, would purchase you, people seem very impressed. If you answer more generically, and truthfully, that your exit strategy is to build a great business with satisfied customers, you get a lot of furrowed brows. It should be the other way around.
Keep up the great work in 2011!
Hi Joseph,
You’re absolutely right. I remember the dotcom bust of early 2000. Companies were talking about clicks and their cash burn rates as a reasons to invest in their companies. Bottom line is investors invest to make money, if you can’t tell me how you are going to be profitable and it turns out your business is designed to be bought out, then you will fail. Focus on your dreams, beliefs, get others to see those dreams. If you’re focusing on your exit strategy you’re not focusing on the business.
John Collins
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[I hired Joe (wasn't Joseph yet) as my Apple student rep when he was at Penn. It's a shame Joseph didn't leverage his opportunity with Apple any better.
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Hi Joseph,
You have a great sitem and I think you make a good point in this post but I have a guestion: If a company is currently working solely on building traffic/ branding- with the hopes/ expectations that it will ultimately open up opportunities (either through selling advertisements or other ways of monetizing the site), shouldn’t the term “exit strategy” still be more appropriate than “success strategy?”
-Elliot Warren
elliot – thanks for the note and comment. building a brand/traffic/users can certainly be part of a success strategy. for example, one of the company with which I am working, Lookout, is following a freemium model. They have been giving away a free version of their smartphone protection software for android for the past year+ and now have millions of users and only now have launched a premium product with new and additional features that customers are buying. if the only reason you are building traffic is so that google buys you, then the issue is that if google doesn’t then your exit strategy is bankruptcy…
I can’t tell you how many times I was asked about my “exit strategy” while pitching my last two companies to series A venture capital (neither have achieved liquidity yet after 10 and 5 years respectively). Funny, the investors in the first two companies never asked such crazy questions (both achieving liquidity within 4 years of series A). I don’t think it’s a coincidence. Those who ask that question are more likely to be “financial engineers” than “business partners”. “Financial engineers” make poor business partners. They often use very short term financial metrics to drive bad decisions forced by “engineered” control provisions in their legal paperwork. You’re better off staying boot-strapped if you can manage it.
In any case, to Joseph’s hidden point in the Wikipedia definition of “exit strategy”, even the “financial engineers” should be courteous enough to use the term “liquidity strategy”.
- Mark.
Hey! I disagree. I think this post only confirms the myth that exit=failure. An exit strategy is more about succession and long term planning. Have a look at my post on WHY YOU MUST HAVE AN EXIT STRATEGY.
http://www.awovi.com/2010/12/16/why-you-must-have-an-exit-strategy/
thanks for the note and thoughts. i think the difference is that you are thinking about a personal exit strategy, i.e. how does an individual leave. i agree that planning for succession is super important – even if you are not planning to leave. because if something ever happens, well, better to be prepared. that said, for companies, you should not have an exit strategy for a company. it usually means the end of the road…
I agree with you. Incidentally, I just wrote something similar: http://www.attentionmax.com/builders-versus-traders.
Cheers.
Great post.
When pitching our startup to angels, that infuriating question meant they just didn’t understand the concept, nor the people behind it.
As for the three angels who did invest, not one ever mentioned exits.
(They did however mention such things as “the best idea I’ve seen in 30 years,” which might be why.)