Childish Gambino (aka Don Glover) on the song “The Last”

“As a young entrepreneur, you tend to believe what you’re told from the most confident person you know”

@dhh vs @ericries from Farhan Rehman on Vimeo.

The video above is shows an excellent debate between the lean startup vs. getting real methodology to build businesses: Daniel Heinemeier Hansson (co-founder of 37 Signals and co-author of Getting Real and Rework) and Eric Ries (founder of IMVU and father of the lean startup movement). Hansson is very much of the mindset that today’s early-stage companies aren’t focused on the only metric that matters in business: profit. If today’s so-called successful startups like Facebook or Twitter charged their customers from day one, they wouldn’t require the hundreds of millions of dollars of venture capital that were required to build these companies.  Eric Ries, on the other hand, argues that it is difficult, if not impossible, to charge a customer before you understand what it is she wants.

Both make very interesting points, and both in their own respect are right. I found myself agreeing for the most part with the other person each time a counterpoint was made. What I realized was that both need to coexist and both need to be discovered as soon as possible. Once a startup finds product/market fit, they should immediately find the most appropriate way to charge someone for it.

Okay, so the title of this post isn’t necessarily true. For VCs, Angels or any other outside investment source, going public is an exit strategy. But for you, the entrepreneur, the one I care about most, the IPO is not. I’m sure many may disagree with me, but before passing judgement, let me explain.

First, let’s talk about Exit Strategies. I’m sure you’ve heard it a million times but…

“Start with the end in mind.”

You always have to think about where you want to be, then plan how you get there. And for the startup entrepreneur, the exit is the culmination of building a company, so its imperative you start there. When starting a (long-term, successful) business, you plan (and hope) that eventually the business you start will outlive you. And it has to, for you to sell it to someone else, it has to have significant value when you leave. Someday, no matter what, your business is going to operate (or not operate for that matter…) without you. Whether you’re acquired, your Board fires you and hires a new management team, you die, you get burnt out and choose to leave, etc., you must plan for a scenario like that from the start. And I know, thinking about an IPO seems so far out there today, but I’ll talk about why this is important to think about in a quick digression.

For those of you who don’t know what an exit strategy is, visit Investopedia for more info.

A quick digression…

In every pitch we’ve done for Pocket Tales to potential investors, acquisition and exit strategy is part of the discussion. Who’s going to acquire you? For how much? How long do you think it will take your business to get there? The reason being, the only time investors make the returns they need to survive is when your company is acquired. Investors will always be looking for a way to get your company to acquisition stage (and they’re looking to do that ideally in 5-7 years).

But here’s the problem: YOUR dreams and aspirations aren’t to be just another base hit Google acquisition (*cough* Aardvark *cough cough*). No, you see grander visions for your company. You want to BE the next Google. Heck, while you’re at it, why not set your sights on ACQUIRING (!) Google. Odds are, if you want to be the company that’s doing the acquisitions, you can’t be acquired yourself.

So, if you’re a home-run company that doesn’t want to be acquired, the best liquidity option for investors is an IPO. If you truly have a company with all the right ingredients to go public, its very likely that you’ve also become a strong acquisition candidate to another company. Some of your early investors might get antsy and entertain the tempting acquisition offers you’ll probably be getting all along the way. This is problematic for you as an entrepreneur to reach your grand visions. So, thinking with the end in mind, you have to be looking now for those early-stage investors that are aligned with you when you turn down mulit-million dollar acquisitions, fighting those investors who might force an early transaction to occur.

So, back to the matter at hand…

Why is an IPO not an exit strategy for entrepreneurs? Well, for two main reasons: 1) the premise of an exit is based on shareholders leaving, completely, and 2) the odds that you, the early stage founder, has the right skills to take a company public is little to none.

1. The Exit
When you craft an exit strategy, you’re basically planning on liquidating your shares and removing yourself fully from the business. The point of an exit is to leave the day-to-day operations of the business while cashing out some or all of your shares at the same time. Essentially, you’re “retiring” and moving on to do other things. When you take a company public, as an entrepreneur, you’re likely not leaving the company because many expect you to continue to build on the success and momentum that took you public. Imagine Steve Jobs and his entire founding team leaving Apple as soon as the company IPO’d. That looks terrible for the company’s future… For Angels, VCs, and other investors, the IPO is a true exit. All they really had in the game was money – it was left to the management team to execute. So, yes, in an IPO, the investors truly exit when they liquidate.

So, what is the IPO to an entrepreneur? To a startup founder, the IPO should be viewed as just another financing round in the long-term scheme of the business (and this is why I hate the extreme emphasis and fascination placed on taking companies public. It’s just another financing round for a company, nothing more, nothing less). Too many founders look at the IPO as the defining moment in their company, when it is not. If you want to build a business that lasts for the next 200 years or more, in all reality, no one moment is the defining moment. Each success is the stepping stone to get to another pivotal point in your business. IPO is not the end game, it’s not even a means to an end. Keep that in mind when you pitch investors and build your business, and understand that a VCs end game is not – and should not – be the same as your end game.

2. The Right Skills
All of the above might be a mute point, because it’s likely the founder isn’t the one who leads the company to an IPO. The founders who develop the product, set the early company vision and search for the business model are probably not the team who manages and executes on growth, and that’s just the cold truth. It is very likely that you, as an entrepreneur, will likely exit the company well before the company goes public because you just don’t have the skills necessary to manage a public company.

A blog post I read recently talking about Steve Blanks thoughts on growing a business captures this most completely:

There are examples of founders who have stayed on through the final phase: Bill Gates, Steve Jobs, Larry Ellison, [Mark Zuckerberg?]. But these guys are the exception, not the rule (and that’s part of why they are famous). Founders need to be aware of, and prepared for, the likelihood that success means they have made themselves irrelevant in the organization they have built.

So, my first-time entrepreneurial friends, maybe you shouldn’t aspire to take a company public. No, maybe your exit strategy should be to take your business to a place where you actually become irrelevant in its continued success.

Ironically, raising millions of dollars is usually easier than raising thousands.

The way the system works is that if you build something of value, the money will find you. Yes, there is a catch-22: you need seed financing, but no one will give you a cent until you have a marketable product and your company is producing revenue—which means that you don’t really need the money. But that’s the way it goes.

-Vivek Wadhwa, From the TechCrunch Article “Ditch the Biz Plan, Buy a Lottery Ticket”

Entrepreneurship exists in the tiny space between madness and genius; and, its journey requires a few cross border violations across both madness and genius to get to the final destination.

- JLM on the Herd Instinct

Let me digress for a moment. Every business needs cash to survive. Lack of cash is one of the sole reasons why businesses don’t. And of course, cash is one of the hardest things for an early stage company to get. So, when a company secures funding, people go crazy. The media publicizes every single time a company raises any amount of money, to the point where young entrepreneurs aspire only to get financing. New entrepreneurs look at those around them as being successful only when they’ve raised big-time money. I won’t lie, I’ve thought the same about some of my close friends who’ve raised money and envied their prowess in navigating and securing private financing. Let’s face it, in some ways, getting money is a form of validation in that someone (other than your mom) thinks your business shows promise, and that feels good as a startup founder.

But this fanaticism has got to stop. I’ve seen too many young, smart and talented people interested in entrepreneurs and the startup community, but none actually want to create something. They want to be involved in all the sexiness of multi-million dollar deals without doing any of the heavy lifting. They want to sit across the table from the entrepreneur and tell them no when they need money. And some have even told me that they want to start a company that helps other entrepreneurs build their company. Are you kidding me?! You want to help others build their dreams?? Bullshit. It’s no wonder why; all you need to do is look around at all of the startup incubators popping up and the voracity at which they churn companies out like well oiled machines. They make it look easy, like any idiot could do it. But the principals at these incubators were once operators, and that’s why they’re good at what they do. For a young entrepreneur who has never built and/or sold a company, how on earth do you think you can provide others with knowledge to do the same?

So, some advice for all those first-time entrepreneurs interested in startups: F the other side of the table. If you’re interested in the “sexy” side of early-stage financing, go start a company or join one that needs your talents. Don’t go sit across from them with the money and say no. Why? Well, here’s the best 4 step process to explain it all:

1. Start and build a solid, stable, platform company.
2. Grow it into something wildly successful.
3. Instead of selling it off to go work for/start an early stage venture fund, use the COMPANY to make investments and do acquisitions.
4. Love life.

That’s how Jeff Bezos’ been doing it, and I bet he’s having the time of his life.

So, to answer the question, I learned how to start a company by finding as many resources to help me make the best decisions when we run into problems. Here are the resources I use:

Blogs

I read no less than 5 blog posts per day on things that relate to Pocket Tales, or problems I think I’ll run into soon. Blogs are an invaluable resource for entrepreneurs, and great because most provide extremely useful info for FREE (for a list of the blogs I read, visit my Startup Resources page). In recent years, social networks have made everyone more open and willing to share what they know with the rest of the world so that if we’re interested, we too can become an expert in just about anything. Find as many blogs that benefit you or your business, and read them consistently.

Advisors and Mentors

If you haven’t noticed, nearly every successful company starts with a Board of Advisors (and later on develops a robust Board of Directors if they land outside investment – Note that Directors and Advisors are not the same thing). Directors and Advisors serve to provide you expert knowledge in a certain subject matter and can provide a number of different resources to you (like contacts, credibility, investment opportunities, advice, and the list goes on). Along with formal advisors for your company, it’s a great idea to have personal advisors as well. I’ve tapped colleagues at the investment bank I used to work at for advice when we negotiated some of Pocket Tales investment documents, but also for advice and connections to advance my personal career. I can’t imagine getting anywhere in life or business without someone with a few gray hairs to help guide you there.

Peer Entrepreneurs, Family and Friends

I think a lot of people overlook peers, friends and family when seeking advice about building their company, but they can prove to be very valuable. Peers who’ve started businesses can immediately relate to the challenges you’re facing, and it’s likely that they’re experiencing the same challenges you are. Sometimes its not even about getting advice, but having a group of close friends that can act as a support group or ears to vent (and trust me, there aren’t enough support groups for the stresses you’ll encounter when starting a company). Not to be forgotten, don’t underestimate family members or your friend’s family who’ve built successful companies. You can also learn an immense amount from your own management team or business partners.

Complete Strangers

One thing startups don’t do enough of is just wide open networking. Last month I spent some time meeting with complete strangers and very loose acquaintances. I’ve learned two things from taking meetings like these: 1) each one has given me at least one very valuable piece of information or connection to someone very valuable that has advanced my business; and 2) it’s very valuable sometimes to get perspective from a fresh, completely unbiased source. You’d be surprised at how much we’ve changed Pocket Tales from advice we’ve received from complete strangers.

As you start to build a company, or are thinking about starting one, be cognizant of all of the great resources you’re surrounded by and recognize the power and wealth of knowledge that is around you. Building a company is all about trial and error, and the above resources can really help to reduce that error part, or help you recover when there is error.