Are We Exiting Gracefully Or Selling Out?

We need more entrepreneurial exits!

There is so much focus on exit strategies these days that I think some of us may have forgotten the true purpose of being an entrepreneur, an investor, or an economic developer: to build businesses. 

Relaxing after a day cycling in Croatia

Yet, how can we do that in a meaningful way when there is so much pressure on new entrepreneurs to hurry up and exit – to make money and get out? This approach does not support long-term value for any of the players. I believe a valuable exit strategy enables the continued growth of the company – not so much an end game as a passing of the puck.

Are we suffering from short-termism?

An exit strategy is essential for all entrepreneurs. Without one, we will never monetize the value of our investment – growth will stall or, even worse, stop. The problem is that the market has forced us to focus on the exit right from initial start-up. We have glorified the act of selling out. Entrepreneurs are being pressured to translate their idea into an attractive sales opportunity as opposed to a high-growth company.

Sitting on an investor panel a few weeks ago provided me with an opportunity to hear the innovative ideas of several start-up entrepreneurs. One founder was young and passionate about an amazing product but seemed to have been coached to present his business as a potential quick exit. He seemed uncomfortable answering questions – what he wanted didn’t seem to be what his investors wanted. He has the potential to build something special and lasting – I wish that was the advice he was receiving.

Advisors and investors encourage entrepreneurs to build innovative prototypes that attract shoppers, who will take the product idea to grow it or, just as likely, close it down to protect their own products. I can’t see how this creates lasting value for our economy. Pundits say those who sell out for the money will reinvest the money in the economy but the statistics don’t really support that thinking. Our current fixation on short-term speculation is really no more than a pump and dump scheme.

We need entrepreneurs who will build lasting businesses – companies that employ people, attract and retain customers, and generate revenues to spend in our communities and make a difference.

One of the core values of entrepreneurs is growth – continuous growth. But the ability to grow isn’t possible when your sole focus is the sale. Growth is achieved when we seek to stay ahead of the curve and continually create new value for customers. If an entrepreneur has reached a point where they are no longer the right person to lead that growth, an exit strategy will come into play to transition the company to new entrepreneurial leaders who will continue the momentum – so that the value of the business is not lost, but multiplied.

It is like the passing of a baton. Without an exit strategy, the value can decline, or walk out the door with the departing entrepreneur. Done well, an exit is a deliberate plan to build the equity value of a company so it can be monetized at the right time, and continue growing. That is return on investment.

For entrepreneurs to truly be the engineers of innovation and growth in our economy, the objective of starting and scaling up businesses needs to be, first and foremost, the building of sustainable high-growth companies. We must combine the development of revenues with profitability and the building of equity value, so we have meaningful businesses that thrive and survive.

I think we need to drop the ‘build-to-sell’ mindset and make the shift to ‘build to grow’. To change our perspective, we need to:

  • Clarify an opportunity for growth that the entrepreneur believes in
  • Focus on the creation of customer value to capture that opportunity
  • Follow through on a strategy to build both revenues and equity to continue the growth

The strategy will not be to chase capital but to show a path to growth that provides an attractive return on investment.

Our market is structured like a barbell. More than 60% of entrepreneurial investors want faster exits from start-ups when only 4% of these new companies actually achieve that goal. On the other hand, 67% of baby boomer entrepreneurs will have to exit in the next five to seven years and only 12% will have any strategy to do so. If both start-ups and transitioning entrepreneurs followed an equity growth strategy, the right investors would be there for both at the right time.

Management and directors are being criticized here and in the United States for their focus on short-term earnings rather than the long-term success of their companies. Entrepreneurs are the real hope for our future prosperity. Now is the time for us to adjust our perspective and build a market, not a shopping center.