Founder success might be becoming irrelevant in the business…

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.