Thursday, February 9, 2012

Revolving Doors Strategy: How to Exit Your Startup & Still Be In It

Something that is less widely written/spoken about is 'How do you exit your start-up successfully and still be in it?' My good friend, Dr Kapil Arora, terms this the "revolving doors strategy". It looks like you are going out but you keep coming right back in !

To exit your start-up successfully is the Mount Everest of start-up achievement. But to exit your start-up successfully AND continue to be there is like sitting on top of the flag pole on top of Mount Everest. Exceedingly extraordinary. I have exited my start-up successfully. But whether I am still there is debatable. I will explain what I mean towards the end of this post. But before we get there, the road to a successful exit requires is based on basic principles of good business. Keep in mind that all that I talk about in this blog is relevant to services based start-ups. I cannot confirm if the same basics apply to an IP based business. Keep the salt handy. You may need a pinch any time. The basic principles of good business which enable a successful exit for a founder are ...

MARKET - BUSINESSES THAT ADDRESS A LARGE OR COMPLEX NEED ARE GOOD FOR EXIT

If your business addresses the simple need of lots of people or a complex need, it is likely that it will grow, gather momentum and start running itself. Which is the kind of business that you can successfully exit. Conversely, if your business solves a simple need of a few people it will not scale and will not make profits. It is unlikely you will successfully exit. The matrix below summarizes my point. If your business is in the red quadrant, a successful exit is unlikely. Green quadrants are good. The yellow quadrant is excellent for a successful exit.



BUSINESS MODEL - GIVEN THAT YOU ARE IN THE RIGHT BUSINESS, BUILD A BUSINESS MODEL THAT MAKES A LOT OF PROFIT AND/OR SCALES FAST.

A lot of entrepreneurs find this counter intuitive. Isn't a start-up about passion and ideas? Do we have to make a profit? Aren't start-ups supposed to sacrifice profit for growth? Answers ... 

1) You cannot sacrifice what you do not have - so you can sacrifice profit for growth only if you HAVE a profitable business model to start with. 

2) If you are not profitable, it is that much harder to successfully exit. Because profits increase affordability. Affordability enhances likelihood of hiring smart people. Hiring smart people is critical to exit. So make sure your business model is profitable, even if you are not making money currently.

3) AND/OR scale fast - if your strategy is scaling rapidly rather than profits, then build a rapid scale business model. Scale creates momentum, which in turn enables the hiring of smart people. But if you are scaling and not making a profit, be sure to check whether "not scaling" would have made you a profit. This is a simple calculation to do on an excel sheet provided you are willing to confront the truth. It is good to discover early that you are in an unprofitable business. It would feel terrible running a hugely scaled unprofitable business - think General Motors, Ford, Panasonic, Sony. 

The matrix below summarizes my point on the Business Model. Red is not good for a successful exit. Not making a profit and growing at 20% year on year on a small base of revenue may be the symptom of a bad business model. Greens are good. Yellow is when your prayers have been answered.  



SUCCESSION PLANNING - SPEND TIME TEACHING SOMEONE TIGER RIDING 

Hire smart people and ask them to do your work for you. If you ignore succession planning, it will come back to bite you when you want to exit your business. Running a company is like riding a tiger; fun when you are on it - power, respect, freedom - they are all yours. But when you want to get off, there better be another tiger rider around, or you will just have to stay on.

EXITING

Wish and pray that there is a giant company waiting to gobble you up. If wishing and praying do not work, which is usually the case, then go to every conference in town where the big guys assemble and make sure to tell everyone how well you are doing. Also be highly visible in all media. People say 'companies get bought, not sold'. I will add 'companies get bought, not sold. But only in cases where the buyer has heard of the company'.

If someone buys you, you have money in the bank and you are happy. If no one buys you, you still have a profitable business or a large scale business that can be turned profitable and a succession plan in place. So you can set a date, transition and walk away. Only difference from a buy out is that you have to sit on quarterly Board meetings and demand a dividend so the CEO knows you expect performance and results.

I will let you in on a secret. When I was leaving, I was wondering if anyone could do all the great things I was doing at work. But a year later, they are doing just fine. So even for a moment, do not kid yourself into thinking you are the guy who "runs" the place. You are not. They will do just fine. PROVIDED, you have spent time and effort building people and processes. Which brings us to the point of the Revolving Doors Strategy.

By leaving the company you started, yet leaving behind your values, ideas and successors, you can be there even when you are not there any more. Which is how you get to sit on top of the flag pole on top of Mount Everest. There is so little space on top of a flag pole. Which is why so few get there.

I would argue that NRN achieved it while Bill Gates did not. But that is my next blog post.  
Post a Comment