I was with a friend recently who has a pretty exciting Internet startup company. He has raised some money and might raise more, his product is in beta and it’s good. It solves a difficult technical problem many companies are struggling with. We argued a little over the name of the product. Of course I thought my suggested name was better or certainly cleverer, but then he said, “It doesn’t matter because we’ll probably sell the company before the product ever ships. It may never appear at all.”
His company will exit almost before it enters. This is happening a lot lately and we generally think it is a good thing but it’s not.
If, like me, you spend a lot of time around startups you know that one of the standard questions asked of founders is “what’s your exit strategy?” An exit is a so-called liquidity event — a transaction of some sort that turns company equity into spendable cash often making someone (hopefully the founders) rich enough for their children to have something to fight over.
Typical exits are Initial Public Offerings of shares or acquisitions — one company being bought by another. But this whole scenario isn’t exactly as it appears, because the person typically asking the exit question is an investor or a prospective investor and what he or she really wants to know is “what’s my exit strategy?”
How are you going to make me rich if I choose to invest in your company?
Were it not for demanding investors the exit question would be asked less often because it isn’t even an issue with many company founders who are already doing what they like and presumably making a good living at it.
What’s Larry Ellison‘s exit strategy?
Larry doesn’t have one.
Neither did Steve Jobs, Gordon Moore, Bob Noyce, Bill Hewlett, Dave Packard, or a thousand other company founders whose names don’t happen to be household words.
What’s Michael Dell’s exit strategy? Dell, who is trying to take his namesake company private — to de-exit — wants to climb back inside his corporate womb.
There was a time not long ago when exits happened primarily to appease early investors. The company would go public, money would change hands, but the same people who founded the company would still be running it. That’s how most of the name Silicon Valley firms came to be.
Marc Benioff of Salesforce.com has no exit strategy. Neither does Reed Hastings of NetFlix. You know Jeff Bezos at Amazon.com has no exit strategy.
But what about Jack Dorsey of Twitter or even Mark Zuckerberg of FaceBook? I wonder about those companies. They just don’t have a sense of permanence to me.
And what about Bill Gates? In Accidental Empires I wrote that Bill wasn’t going anywhere, that running Microsoft was his life’s work. Yet he’s given up his corporate positions and moved on to philanthropy for the most part, despite this week’s effort to shore-up his fading fortune by claiming that iPad users are “frustrated.”
Yeah, right.
Bill Gates didn’t have an exit strategy until running Microsoft stopped being fun so he found an exit. And I think the same can be said for any of these name founders, that they wanted to stay on the job as long as it remained fun.
But the new paradigm — the Instagram paradigm (zero to a billion in 12 months or less) — is different. This paradigm says that speed is everything and there is no permanence in business. It’s a paradigm pushed by earnings-crazed Wall Street analysts and non-founder public company CEOs who each work an average of four years before pulling their golden ripcords. In high tech this has led to startups being seen as bricks with which big companies are made bigger.
Sometimes thee bricks are made of technology, sometimes they are made simply of people.
Build or buy? The answer, whenever possible, is now buy-buy-buy because even if the cost of buying is higher the outcome seems to be more assured. My buddy with his startup has solved a problem being faced by other companies, really big companies, so it’s probably easier for one of those to buy his startup than to solve the problem themselves.
And there’s nothing intrinsically wrong with this except it leads to a lot of people being where they aren’t really happy, working off multi-year pay-outs just counting the days until they can get out of the acquiring company that made them rich.
Even those who embrace the quick-and-dirty ethos of almost instant exits seem to do so because they don’t know better. “What’s your exit strategy?” they’ve been asked a thousand times, so they not only have one, their papier-mâché startups are designed from the start with that exit in mind whether it’s the right thing to do or not.
I think this is sad and — even worse — I think it is leading to a lot of wasted talent. It cheats us of chances for greatness.
I wish more companies had no exit strategies at all.
I think a bigger question is what drives creative or ambitious people to suffer through the hard work of starting a company in the first place. That question is what’s important. When and how these developers of useful things decide to split the scene is a secondary issue.
I think Cringe touched on that obliquely. There seem to be two reasons “creative and ambitious” people do it: to immerse themselves in something they love but can’t do elsewhere, and to monetize a clever idea. In the former case you won’t think about exit strategies except to mollify investors. In the latter case, that’s all you’ll think about.
Well said, John.
Well Bob, I’m glad your exit strategy turned back into an exist one. It seems that a lot of the ‘household names’ you spoke about differ from the new crop of ‘pioneers’ in at least one way – they go into it with an exit strategy. For many of the Jobses, Hewlitts and Packards and Gateses of that era, their work was rewarding enough. They really believed they could change the world… and did. But it seems like a lot of the new crop don’t have that same view. And that is truly sad.
Freudian Typo! “What’s your exist strategy?”
Sounds like a better question.
Another Freudian typo – “Sometimes thee bricks are made of technology”. Bob longs for the good olde days…
Agreed, it is sad that people start companies only to sell them – serial entrepreneurs is the title they prefer. It’s like saying the “proof of concept” is the product.
This has always been my reservation with Y-Combinator (Paul Graham’s pre-venture startup factory). They go into a new venture, and coach the founders, almost exclusively for the “…and then pull the cord in a year or so” strategy.
That seems counter-intuitive to me. Why would you want to quit the job you just created, doing something you’re passionate about? According to Graham, as I read him, is so you can do it again with a slightly different idea.
Are replies to comments not counted as comments? There are clearly 5 comments above mine now, and one of them a reply. Yet the comment count at the top says 4. First time I’ve noticed this.
This system takes a long time to process a comment. Sometimes this results in multiple copies of same comment as impatient users click again. So maybe the system takes a long time to update the count of comments. The count is correct now.
Yes. That’s another quirk. Sometimes the act of refreshing the page doesn’t correct things but posting a comment does. It was correct for me also after I made the above post as well. I don’t know if this problem will be fixed with the new “WordPress server” that Bob said is coming around May 15th, but I hope so.
Yes. That’s another quirk. Sometimes the act of refreshing the page doesn’t correct things but posting a comment does. It was correct for me also after I made the above post as well. I don’t know if this problem will be fixed with the new “WordPress server” that Bob said is coming around May 15th, but I hope so.
This is an attempt to update the page from 41 to 44+1=45 comments, to reflect the count on the index page.
This blogging platform is horrible. Cringely should just get it fixed so we stop complaining about it.
The latest weirdness I’m seeing is that this thing is insisting that I’m logged in as Robert X Cringely, and showing an admin panel that floats over the text. But whenever I click on it to do something, it says that I’m not authorized. This is a disappointment.
While we’re complaining about the blog, I’ve never been a fan of the dynamic-to-top button. It floats on top of the text, making it hard to read, and EVERY SINGLE TIME I have to turn it off. This is not making me happy.
You said “EVERY SINGLE TIME I have to turn it off”. How do you do that? I can remove it by using the Readability add-on, but Readability doesn’t do comments. Now that word-wrap works properly, that button is the only thing left making it hard to read, especially when enlarging the page and text while using a small display.
I’m sure there’s a Firefox add-on to do it automatically, but for now this is what I’m doing:
1) Right-click on the border around the button. I have my zoom at 140% to make everything easier to read, so the border is actually pretty big.
2) Click Inspect Element (Q). Now there’s a floating thing next to the button, with a#dynamic-to-top in the label. There’s also the Page Inspector at the bottom of the window.
3) Click the triangle on the right, that pops up a menu.
4) Click Delete Node. Now it’s gone until I reload the page or post a comment.
5) Click the X in the upper-right of the Page Inspector to get that to go away, too.
In Chrome, it’s similar:
1) Right click on the border.
2) Click Inspect Element. Now the Developer Tools window appears.
3) Visually verify that the highlighted line starts with ‘a href=”#” id=”dynamic-to-top” …’
4) Click Backspace or Delete on the keyboard. The button disappears.
5) Close the Developer Tools window the normal way.
In Internet Explorer… it’s harder. Nobody uses that thing by choice, anyways.
Thanks. You are right it is too complicated in Firefox and Chrome. In IE it must be even harder since right-clicking the boarder is no different than the middle. I’m still using IE for the same reason I use Windows…I understand it, especially how to customize it, sometimes with registry scripts. For example, every time I reboot Windows, IE is automatically set to my desired “normal” screen size, zoom level, and text size. IE gets the job done as long as you pair up the right version for your OS (not necessarily the latest). And I’m not even a programmer.
Well, NoScript works, but it’s a bit drastic.
There’s no such thing as a serial entrepreneur. These people are inventors. There’s nothing wrong with that. An entrepreneur is someone who may invent but who also builds a company.
I see nothing wrong with it.
Most of these entrepreneurs have more than one idea they love.
Selling in four years allows them to prove out the idea and then finance the next one without wall street leaches calling the shots.
Jack Dorsey is an example of that. First Twitter and now Square. What’s next in his head?
Or Elon Musk, first Paypal then Electric Cars (Tesla) and Rocket ships (SpaceX).
I think its natural evolution and gives us MORE great ideas not less.
Bill Gates stayed around too long.
Michael Dell has nowhere else to go. The PC is dead. They stick around and lose the entrepreneurial spirit. They get to fat and happy. Give Amazon time. They’ll get there.
Bob, I’m a startup CEO and I have no exit strategy either. My company is being structured the old-fashioned way: to throw off a lot of free cash that can be disbursed tomshareholders. And my investors are all told the same thing: you must evaluate this business like you would a piece of real estate. What is the discounted present value of the future cashflow worth to you? Yes, we might sell but that would be due to someone making us an offer at the high end of our opinion on valuation. If it never happened, and all we did was cut big checks semiannually, we’re going to consider that a win for our shareholders.
While I expect no venture capitalist to engage with that logic, I’m of the opinion there are an increasingly large number of private investors seeking a better-than-average return who will.
Bob, I’m a startup CEO and I have no exit strategy either. My company is being structured the old-fashioned way: to throw off a lot of free cash that can be disbursed to shareholders. And my investors are all told the same thing: you must evaluate this business like you would a piece of real estate. What is the discounted present value of the future cashflow worth to you? Yes, we might sell but that would be due to someone making us an offer at the high end of our opinion on valuation. If it never happened, and all we did was cut big checks semiannually, we’re going to consider that a win for our shareholders.
While I expect no venture capitalist to engage with that logic, I’m of the opinion there are an increasingly large number of private investors seeking a better-than-average return who will.
Well put.
The drive to cash in quickly is also part of the culture that treats employees as kleenex. When there’s no staying power, there’s no loyalty.
It’s no surprise that people in the driver’s seat during the company’s growth stay along for the ride, those are the good times.
“Exist” strategies generally mean that the founder is really interested in the business, not just the potential payout. Kind of makes me think of the “nation of shopkeepers” remark. The shops exist because of their keepers and their interest in them.
Based on the pic, can we guess that this startup company makes solutions for entryways at large companies?
No, Mike. Bob said it was an Internet company.
Really, are you that limited in your imagination as to what an Internet company can do?
Perhaps they have built the software for the entry and exits at a large company.
Don’t be ridiculous, Mike. The picture of the “exit trap” is just an illustration to accompany Bob’s post.
Mike, in my limited imagination, I believe the picture of the “exit trap” is just an illustration to accompany Bob’s post.
Suspect Mike is joking. 🙂
That’s probably it, Ronc. Sometimes I just get carried away. Sorry, Mike.
Yea, that’s two posts in a row I’ve been fooled.
Sometimes, startups will also worry about the competition they will come up against if they refuse to sell to the ‘platform’ companies like Google, Microsoft, etc.
It starts to feel like a lot of these companies are founded as get rich quick schemes rather than anything else.
I know of one industry that defies this pattern. Though it’s an inherently weird one.
The games industry is full of small companies (none of which use the term startup, but that’s what they are) started by people who left their old job precisely to pursue fun. It’s kind of a crap shoot with so many of them now, but hey, when has business not involved a little luck.
Heck even some of the industry giants (like old timers at Epic) are leaving to start new smaller companies. Not to make money or sell them off, but just to recapture the glory days of the startup feel. It’s pretty awesome. Though I’m sure it won’t last forever.
Something like six founding and/or very early employees at Woot have left because the acquisition by Amazon has killed the entrepreneurial energy.
Will Smith … “There is no reason to have a Plan B because it distracts from Plan A.”
Will Smith … “There is no reason to have a Plan B because it distracts from Plan A.”
Interesting that you also see Facebook as impermanent, I agree with you – it feels so throwaway. I could wake up tomorrow and be using Friendster or Google+ and not really notice – or care.
I don’t agree about Twitter – I initially did but I changed my mind.
Why? It’s extremely “light” (in the sense of “light play” in the game of Go) – it provides a near-commodity essential service, neatly and with minimum fuss. I do real-time computer art, and these days all the programs I have twitter their statuses (statii?) to Twitter as a matter of course – because it’s easy to do, it’s showy, and it’s actually really useful (I can find out how they’re all doing by going to a single web page).
And they don’t get in my face like Facebook. Of course, their “cost per tweet” is probably significantly less than Facebook’s “cost per post”.
According to Merriam Webster the plural form is statuses. If it were a Latin word, the plural would change the “us” to an “i” making it “stati”
But “status” does come into English from Latin…
Rupe
[…] The Exit Trap – I, Cringely […]
Atoms are not as ephemeral as bits. Thus companies built around physical goods are not as ephemeral as companies built around data alone. Entrepreneurs know this and formulate their strategies accordingly. The line of demarcation is not fixed; Microsoft for example has traditionally packaged their bits as atoms, available from store shelves, so they’ve got their foot in the physical goods business. But companies like Facebook and Twitter are exclusively bits companies and as such can be here today, gone tomorrow at the flick of a power switch.
Atoms are not as ephemeral as bits. Thus companies built around physical goods are not as ephemeral as companies built around data alone. Entrepreneurs know this and formulate their strategies accordingly. The line of demarcation is not fixed; Microsoft for example has traditionally packaged their bits as atoms, available from store shelves, so they’ve got their foot in the physical goods business. But companies like Facebook and Twitter are exclusively bits companies and as such can be here today, gone tomorrow at the flick of a power switch.
(If this post appears twice it is because on first submission, CloudFlare came back with ‘The Site Is Offline.’ WTF?)
Great Read thanks for the info!
Great Read thanks for the info!
An excellent post. I think this is an important topic. It was bad enough some 50 years ago as the paradigm took off that “a manager is a manager,” take your MBA and run a company making widgets or films, no matter, who cares about the product. Now it’s evolved as Cringely points out to a mere “make something that can be hyped to some ridiculous value and dump quick” (okay, granted, I took the point a bit further).
Ultimately, this also goes to what I see as the greatest problem in the post-post-War economy, that we worship growth rather than profit and sustainability. In the post-War (meaning World War II) era, growth could indeed be counted on. In the period since then and, for a while longer, we can count on the same in the “new” markets (the BRIC markets, and those “behind” them now emerging). But growth is a rocky road, and we’ve too often sacrificed profitability and sustainability, which can assure us of a good living on a more steady basis.
It reminds me of an accountant who was just a bit older than I (I’m 50) who shook her head as she said she remembered how the bottom line used to matter more than just “more.” A few months later, she was part of a layoff. Somehow seems related…and of course rather sad…
Interestingly it’s the Bill Gates link I’m more interested in. Why? This is someone who got his exit from Microsoft but keeps returning to tell us we should be buying more Microsoft products; even the duff ones.
It’s also interesting that having just bought a new MacBook Pro, my second one after being so impressed with my first, that I’m also about to buy Pages and Numbers (I would have bought pre-installed but couldn’t resist walking in to an Apple store to buy direct!). My experience of Office 2010 on the PC has put me off, plus the cost.
Steve Jobs said that if you don’t cannibalise your own sales, someone else will. That’s what Microsoft are now witnessing. But rather than offer Office to the iPad or (that god awful copy) Android they’re trying to offer a lame interpretation of a tablet with their own ham-fisted attempt of a portable OS.
This isn’t an exit strategy for the founders of Microsoft; it’s an exit strategy for Microsoft.
Gates didn’t have an exit strategy until Microsoft was found guilty of Antitrust while he was at the helm; after which (to what I understand) the CEO is no longer allowed to be a CEO of any company, and Gates move from CEO to “Chief Software Architect” was just not a fun position for him; though it did allow an easier transition to Ballmer – that said, Ballmer still couldn’t seize control like he needed until Gates left entirely, too many people looked to Gates for the answers even when Gates wasn’t in the position to do so any more.
So it’s no suprise that Gates still hocs Microsoft gear – it was his baby, and he still wants to see it succeed even though he was essentially forced out of it.
For desktop users it certainly looks that Microsoft has lost their way since Ballmer took over and Gates left.
At an engineering seminar a couple of years ago it was amazing to see how many had gone from XP to Windows 7. Skipping Vista completely. I believe it would be a similar story with Windows 8 now.
At a different seminar last year there was a significant number of people there running Linux. Personally I think that caused more problems than it solved, and perhaps it was a mistake to invite the local Linux group.
Microsoft Office is too expensive. Price of the hardware has gone down, but the costs of the software up. I would tell home users to use one of the free office packages instead. Adobe have already made this mistake. Who would buy Acrobat Distiller now when the free ones work so well?
But Microsoft are getting none of the iPad business. They’re not offering any software for the iPad worth talking about, and that is a huge mistake. HUGE mistake. You don’t have to be smart to realise this, just fairly dumb to miss it. Over to you, Mr Ballmer….
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It seems to be the way of the world now. Who has a traditional career these days? It used to be that people would become teachers, plumbers, tractor salesmen, firefighters etc and they would finish their career in the same ‘vocation’. Some times without having moved up the ladder of corporate success. One of the results is a lack of experience in so many vocations.
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