Each day, you’ll see a new startup entering the market. However, most of them meet the same fate of getting acquired instead of launching an IPO (Initial Public Offering). So, why don’t founders think or talk about three exit strategies?
As more startups meet the same fate, it begs the question, what are the things stopping the founders from talking about the future of their startups? In this article, we’ll discuss some of the common myths and biases that come the way of founders that stops them from thinking ahead.
Why Having an Exit Strategy Is Vital?
While most entrepreneurs know that the ultimate fate of a startup is acquisitions, they don’t seriously think about the exit plan. They will only focus on it when there is no other option left on the table except for selling the startup or if the acquirer has a lot of interest in their startup.
Consequently, they cannot leverage the vital strategic opportunities to help them get a better result out of the deal. The ideal way out for entrepreneurs in this situation is to plan an exit strategy years before the acquisition takes place. This way, they will have a clear idea about where they plan to stand when it is time to sell the business.
But if it is so important for startups to devise an exit strategy, why are they neglecting it? The simple answer is that many myths circulating in the startup community make it difficult to discuss exit planning.
Reasons That Prevent Founders from Talking About Exit Strategies
Creating and implementing an exit plan requires a collective effort from all the stakeholders. However, a few myths and reasons make it impossible for founders to discuss exit planning. Understanding them will allow entrepreneurs to make the most out of the final sale for their startup.
Focusing on Current Rather Than the Future
Generally, entrepreneurs have a lot on their plate to deal with, making it impossible for them to focus on the future. So, most entrepreneurs don’t consider strategic planning necessary for their startup. Moreover, they tend to look at the near, short-term gains instead of focusing on the bigger picture. Therefore, they continue to ignore future risks and rewards.
It explains why most entrepreneurs don’t spend too much time building an exit strategy. The current bias prevents entrepreneurs from focusing on long-term planning. As a result, it leads to a strategic failure that can cost entrepreneurs their startups.
If you don’t talk about a particular thing, we cannot figure out ways to improve. The same is the case with strategic planning, as entrepreneurs fail to discuss an exit plan for their startups.
Too Much Optimism
While optimism is critical in helping entrepreneurs achieve their goals, it can soon raise a false sense of self-confidence. Even though most entrepreneurs know how difficult it is for new businesses to sustain, they don’t apply the same risk in their situation.
Most people show too much optimism regarding the probability of success. Consequently, they don’t consider that the most likely outcome would be to go toward an acquisition. They’re likely going to consider focusing more on taking the company public.
That is where the problem starts since no entrepreneur would think or talk about building a strategic exit plan since they don’t have a realistic idea of their startup’s prospects. The ideal thing that entrepreneurs can do to deal with these issues is to develop a long-term strategy about the possibilities of a strategic sale as the final fate of their startup.
Not just that, but they also need to continue making necessary changes to their plan by understanding the new data about their growth, evolving market conditions, and the changes in their industry.
The Myth of Acquisition Failures
As we read and hear about failed acquisitions, it casts a bad light on this choice and spreads a misleading and false narrative. Entrepreneurs have a common misconception that acquisitions can negatively impact shareholder value and won’t help them accomplish their goals.
Therefore, this misconception makes it difficult for startups and entrepreneurs to focus on selling their businesses. They won’t consider the acquisition a viable option to achieve their company’s goals and fulfill their aspirations. However, that is different from the result of most of the acquisitions.
Entrepreneurs should research the actual data to understand the chances of acquisition failure. It will allow them to discuss an exit strategy with their shareholders since they can respond to the entrepreneurs’ queries.
Having a Strategic Plan Hampers Innovation
Since innovation is a key factor behind a business’s growth, many entrepreneurs believe that having an exit strategy will take away the motivation to bring something new to the table. Entrepreneurs fear that having an exit strategy would make it a favorable option to get out by selling their business and not having to deal with the difficulties.
However, that is not the case since there is no research or evidence to back the claim that strategic planning to reduce the risk can impact innovation. However, there is growing evidence that excessive stress and pressure can hamper entrepreneurs’ ability to think innovatively. Not just that, but it can also negatively impact their mental health and lead to burnout and other issues.
An important thing to note is that entrepreneurs with excessive stress and pressure can find it hard to develop innovative ideas. The stress of risk and failure hampers the ability to think outside of the path.
With a viable exit plan in position, the startups have a much better regarding what to do if things start to go south. It has a "panic button" effect, meaning they have a backup option to control or avoid a stressful situation. Since the entrepreneurs and their teams will have less stress, they can put forth the most creative ideas on the table.
While there is always risk involved in entrepreneurship, it is not necessary to stay under excessive pressure of risk and failure to drive entrepreneurial passion and commitment. Instead, being passionate and stress-free allows them to work on something that can yield fruitful results.
Dealing with Investors
Venture investors are more likely to invest in businesses that desire to take risks and create something. They like to engage with entrepreneurs that have a mission of building a business at scale. Also, they want entrepreneurs to have a persistent dedication to their startups, so they stick with them in times of difficulty and hardships.
Since businesses have to deal with hardships, there needs to be a clear and concise accord between the investors and entrepreneurs to take relevant actions and survive through thought times. Investors don’t prefer to work with entrepreneurs with a built-to-flip since they fear individuals won’t have the drive and perseverance to develop innovative ideas.
They believe entrepreneurs won’t come up with different ideas to deal with the inevitable obstacles. Therefore, investors don’t prefer to talk about having a serious plan with the entrepreneurs about a strategic exit plan. Nevertheless, entrepreneurs must carefully understand and develop the right strategy to deal with this issue.
It is best to create a proper context by understanding the investors’ concerns and addressing them before discussing exit plans. The optimal approach is to discuss the benefits both parties can get working on a solution that is in the best interest of the entrepreneurs and the investors.
An important thing for entrepreneurs to note is that they need to collect relevant data, test their theories, and collect relevant data to make clear long-term strategic options. Even if the investors and entrepreneurs have the ultimate goal of launching an IPO for the business, it would be best to have a strategic acquirer as a standby option. It will improve the overall valuation of the IPO.
The Bottom Line — Talking About Exit Strategies
As an entrepreneur, you want your business to reach the pinnacle of success. However, this doesn’t mean you ignore the ground facts and turn a blind spot to the realistic view of your business. Therefore, it is vital to have a proper exit strategy to ensure that you can leverage the opportunity when selling your business.
Designing and implementing an exit strategy beforehand will increase your chances of success and survival in the long run. The first thing that you need to do is discuss with your stakeholders so they are open to discussing creating an exit strategy.
Understand their concerns and address their issues before you decide on moving to the next step. An effective approach to creating strategic planning with all the stakeholders on board will help steer your business out of tough times.
