Friday, March 12, 2010

Why the term "Exit Strategy" should be kicked to the curb

Mark Suster, a respected Los Angeles-based VC, has been taking a lot of flak for a blog post he wrote suggesting that the saying "fail fast" should be discarded. Many people took Suster's comments as a rebuke of Lean Startup principles, but they were in fact highly supportive of Agile and Lean concepts. Suster was targeting entrepreneurs who use "fail fast" as an excuse to fail using someone else's money: "If at first you don't succeed, quit and make someone else pay for it."

Recognizing that misery loves company, I want to take on another popular phrase that should be kicked to the curb: "Exit strategy", specifically when it's used in the following sentence: "What's your exit strategy?"

If a company is successful, there are lots of possible exit strategies:
  • Sell the company to a bigger acquirer for a lot of money
  • Merge with another company
  • Go IPO
You can also continue to run the company successfully and grow from internal growth, or acquire other companies.  A successful company doesn't have to worry about exit strategies.

An unsuccessful company, on the other hand, needs to worry about exit strategies a lot. The options for an unsuccessful company include:
  • Selling the company, usually for a fraction of the amount put in by investors
  • Liquidating the assets of the company in the hope that something (a product, patents, etc) will fetch a good price
  • Using available cash reserves to pay off creditors and shut the company down
  • Going bankrupt
None of those are appealing options.

Moreover, the startups that are asked about their exit strategies are usually the ones at an early enough stage of their development that it's impossible to say what an appropriate exit strategy should be. So, the founders or managers make up an exit strategy that they think VCs will want to hear. If the IPO market is vibrant, that will be the first choice; in a period like today where few IPOs are launched, they'll emphasize acquisition or merger.

The appropriate question isn't "What's your exit strategy?", it's "What's your business model?" and "How will you make this into a successful business?". The answer to those questions will determine whether the startup will even get to the point where a positive exit strategy is possible.
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