Why Founders Are Afraid to Talk About Exit Strategies

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Acquisitions are a much more common end point for startups than IPOs. So why does no one talk about them? There are five common myths and biases that get in the way, and prevent founders from thinking ahead: optimism bias, present bias, signaling failures, the myth of entrepreneurial risk taking, and the myth of acquisition failures. Understanding these, and knowing how to work around them, can ensure founders have the broadest slate of possible options, and aren’t left scrambling when an acquisition deal is suddenly on the table.

For every IPO there are over 30 acquisitions each year. But while nearly all entrepreneurs and their board members know that an acquisition is the most common destiny of a successful startup, they rarely strategize about a potential sale. Instead, they only take exit planning seriously when their startup either desperately needs to sell or has inbound interest from an acquirer. As a result, they either miss out on significant strategic opportunities or end up with a suboptimal outcome.

The only way out of this unfortunate predicament is for entrepreneurs to devise an exit plan early and lay the groundwork for a potential sale to acquirers long before a sale is imminent. Acquisitions can take years to come to fruition. In my own experience as a founder, lack of advance exit planning led to the demise and fire sale of my first startup Jaxtr, a promising communications solution founded in 2005 with top-tier VC backing and a large user base.

If exit planning is so important, though, why is it so commonly neglected? The short answer is that a number of myths and biases about selling a business have rendered exit planning discussions a taboo topic in the startup community. And since creating and executing an exit plan is not a solitary endeavor and requires close collaboration with key stakeholders — senior leadership, board members, major investors — this taboo effectively shuts down any exit planning initiative before it gets started.

Why We Don’t Talk About Exit Strategies

Understanding this taboo’s underlying myths and biases as set forth below will enable entrepreneurs to overcome it, take charge of their destiny, and unlock their startup’s hidden strategic potential and options.

Optimism bias.

Optimism fuels entrepreneurship, but it can also give rise to a false sense of confidence and create strategic blindspots. Most entrepreneurs know that the chances of success for any startup are slim, yet they don’t consider themselves to be subject to those statistics. In a survey I conducted of nearly 30 early-stage founders in the fall of 2021, over 90% agreed that less than 25% of all startups will succeed, in line with startup statistics overall. But when I asked what they considered to be their own likelihood of success, their response was much closer to certainty, demonstrating that our entrepreneurial optimism can simply blind us to our own reality. As a result, entrepreneurs overwhelmingly focus on the least likely outcome: taking the company public.

The problem with this outlook is that no entrepreneur can make proper strategic plans and overcome the obstacles in their path without a realistic view of their future prospects and the nature of those obstacles. To keep this blindspot in check, entrepreneurs need to take the time and create a long-term plan that reflects the realistic chances of an IPO vs a strategic sale as the ultimate destiny of their startups. And they need to periodically revisit and revise this plan as they gather new data on their own progress, changes and consolidations in the industry, as well as evolving market conditions.

Present bias.

In general, we tend to show a bias towards the present, prioritizing near-term outcomes over long-term results and significantly discounting future risks and rewards. Because entrepreneurs spend their days fighting multiple fires and face significant resource constraints, they are especially prone to this bias. Strategic planning is considered a luxury by many entrepreneurs. This can explain why 70% of the respondents to my survey had spent little to no time on creating an exit strategy and 60% considered themselves quite unprepared to respond to an acquisition interest. This present bias creates strategic debt that accumulates over time and can cost entrepreneurs their business. We can’t improve what we don’t pay attention to, and delaying talks and considerations related to a strategic exit today renders entrepreneurs utterly unprepared for the single most outcome-defining event in their startup’s lifecycle: its exit sale.

Signaling problems.

Venture investors tend to be attracted to mission-driven entrepreneurs who have the courage to take major risks and aspire to build scaled businesses. Moreover, they expect entrepreneurs to have the unwavering commitment to stay the course during times of hardship. Since all startups go through periods of hardship, without such strong resolve amongst the founders and leadership, it would be almost impossible to turn things around and survive. As such, investors dislike founders who show signs of a built-to-flip mindset — they worry that these individuals lack the resilience and perseverance to innovate their way around inevitable obstacles in their path and will end up either selling their business too quickly or prematurely abandon hope. The result of this is that investors typically avoid getting into any serious exit planning conversations with entrepreneurs.

By understanding this aversion, however, entrepreneurs can adopt the right approach. That entails establishing the proper context and addressing investors’ concerns and discomfort directly before discussing exit plans. The best way to do this is to emphasize how it’s in both parties’ interest to prepare for all possible contingencies, protecting against downside risks while maximizing the upside potential. Entrepreneurs need to articulate that in order for them to create viable long-term strategic options, they need to plan ahead, gather data, and test their hypotheses, just as they do when they search for product-market fit or explore a go-to-market strategy. The ultimate alignment of interest between entrepreneurs and investors exists. Even when the goal is an IPO, having strategic acquirers on standby would only increase the IPO valuation. The nuance here is in communicating the need for an exit strategy clearly and within the right context.

Myth of entrepreneurial risk taking.

Many assume that because innovation involves risk, risk mitigation strategies would hurt an entrepreneur’s underlying motivation to innovate. They worry that having an exit strategy would make it too tempting for an entrepreneur to rush to a quick sale rather than work through the hardships and reach for the stars.

Those fears are misplaced. While there is no evidence in support of the claim that risk mitigation hurts innovation, there is mounting evidence about the harmful side effects of excessive risk and the toll the resultant stress has taken on the mental health of entrepreneurs, such as research into the connection between entrepreneurial stress and burnout as well as the prevalence of mental health issues among entrepreneurs. Innovation is not forged in overburdened entrepreneurial brains; instead, innovation is a result of repetitive, iterative, and creative experimentation. Stress associated with excessive risk only makes success harder to achieve.

A viable exit path not only provides strategic optionality, it makes running a startup much less stressful due to a what’s known as the “panic button” effect: believing one has the option to escape a stressful situation will reduce the amount of stress actually experienced in that situation. While entrepreneurship necessarily involves some amount of risk-taking, entrepreneurial passion and commitment neither springs from, nor grows stronger with, excessive risk. Instead, what motivates entrepreneurs is their conviction that they are involved in the creation of something that will have a lasting impact. Which is exactly what a viable exit path enables.

Myth of acquisition failures.

The media’s focus on acquisition failure stories has perpetuated a false narrative and popular misconception that most acquisitions destroy shareholder value and fail to achieve their stated goals. Anyone who is under that impression, of course, would be reluctant to seriously embrace the idea that selling their business is a viable path towards achievement of their company’s mission and fulfillment of their aspirations. But most acquisitions don’t fail. Any entrepreneur who wants to engage in serious deliberations about their exit strategy with their stakeholders needs to be familiar with the actual data and respond to any stakeholder skepticism about acquisitions.

I take the best proxy for measuring the success or failure of M&A transactions to be their popularity and the rate at which they occur, reaching record number of deals in each of the past four years. It is important to note that acquisitions don’t just happen based on a whim. Much detailed analysis and planning goes into the process with many people and approval levels involved on each side of the transaction. And when dealmakers are asked to evaluate the success of acquisitions, they consider the majority to have met or exceeded their expecations. Despite the popular acquisition failure stories, there are many more under-reported successful ones such as these.

. . .

To tilt the odds of success and survival in their favor, entrepreneurs need to devise and implement an exit strategy long before they are seriously considering a sale of their business. The first step in that direction is to overcome the exit taboo and open the communication channels with their key stakeholders. The sooner entrepreneurs can overcome these myths and biases and start an honest dialogue around their long-term strategic options, the better positioned they will be to influence and shape the ultimate fate of their startups.

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