Acquisitions are a way more widespread finish level for startups than IPOs. So why does nobody discuss them? There are 5 widespread myths and biases that get in the way in which, and stop founders from pondering forward: optimism bias, current bias, signaling failures, the parable of entrepreneurial threat taking, and the parable of acquisition failures. Understanding these, and realizing how to work round them, can guarantee founders have the broadest slate of attainable choices, and aren’t left scrambling when an acquisition deal is all of a sudden on the desk.
For each IPO there are over 30 acquisitions every year. But whereas almost all entrepreneurs and their board members know that an acquisition is the commonest future of a profitable startup, they hardly ever strategize a couple of potential sale. Instead, they solely take exit planning significantly when their startup both desperately wants to promote or has inbound curiosity from an acquirer. As a end result, they both miss out on important strategic alternatives or find yourself with a suboptimal consequence.
The solely approach out of this unlucky predicament is for entrepreneurs to devise an exit plan early and lay the groundwork for a possible sale to acquirers lengthy earlier than a sale is imminent. Acquisitions can take years to come to fruition. In my very own expertise as a founder, lack of advance exit planning led to the demise and hearth sale of my first startup Jaxtr, a promising communications resolution based in 2005 with top-tier VC backing and a big consumer base.
If exit planning is so essential, although, why is it so generally uncared for? The quick reply is that plenty of myths and biases about promoting a enterprise have rendered exit planning discussions a taboo matter within the startup group. And since creating and executing an exit plan will not be a solitary endeavor and requires shut collaboration with key stakeholders — senior management, board members, main traders — this taboo successfully shuts down any exit planning initiative earlier than it will get began.
Why We Don’t Talk About Exit Strategies
Understanding this taboo’s underlying myths and biases as set forth beneath will allow entrepreneurs to overcome it, take cost of their future, and unlock their startup’s hidden strategic potential and choices.
Optimism bias.
Optimism fuels entrepreneurship, however it could possibly additionally give rise to a false sense of confidence and create strategic blindspots. Most entrepreneurs know that the probabilities of success for any startup are slim, but they don’t think about themselves to be topic to these statistics. In a survey I performed of almost 30 early-stage founders within the fall of 2021, over 90% agreed that lower than 25% of all startups will succeed, according to startup statistics total. But once I requested what they thought of to be their very own chance of success, their response was a lot nearer to certainty, demonstrating that our entrepreneurial optimism can merely blind us to our personal actuality. As a end result, entrepreneurs overwhelmingly deal with the least possible consequence: taking the corporate public.
The drawback with this outlook is that no entrepreneur could make correct strategic plans and overcome the obstacles of their path and not using a lifelike view of their future prospects and the character of these obstacles. To maintain this blindspot in test, entrepreneurs want to take the time and create a long-term plan that displays the lifelike probabilities of an IPO vs a strategic sale as the last word future of their startups. And they want to periodically revisit and revise this plan as they collect new knowledge on their very own progress, modifications and consolidations within the business, in addition to evolving market situations.
Present bias.
In common, we have a tendency to present a bias in the direction of the current, prioritizing near-term outcomes over long-term outcomes and considerably discounting future dangers and rewards. Because entrepreneurs spend their days combating a number of fires and face important useful resource constraints, they’re particularly inclined to this bias. Strategic planning is taken into account a luxurious by many entrepreneurs. This can clarify why 70% of the respondents to my survey had spent little to no time on creating an exit technique and 60% thought of themselves fairly unprepared to reply to an acquisition curiosity. This current bias creates strategic debt that accumulates over time and might price entrepreneurs their enterprise. We can’t enhance what we don’t concentrate to, and delaying talks and issues associated to a strategic exit right now renders entrepreneurs completely unprepared for the one most outcome-defining occasion of their startup’s lifecycle: its exit sale.
Signaling issues.
Venture traders have a tendency to be attracted to mission-driven entrepreneurs who’ve the braveness to take main dangers and aspire to construct scaled companies. Moreover, they anticipate entrepreneurs to have the unwavering dedication to keep the course throughout instances of hardship. Since all startups undergo intervals of hardship, with out such robust resolve amongst the founders and management, it could be virtually not possible to flip issues round and survive. As such, traders dislike founders who present indicators of a built-to-flip mindset — they fear that these people lack the resilience and perseverance to innovate their approach round inevitable obstacles of their path and can find yourself both promoting their enterprise too shortly or prematurely abandon hope. The results of that is that traders sometimes keep away from stepping into any critical exit planning conversations with entrepreneurs.
By understanding this aversion, nonetheless, entrepreneurs can undertake the correct strategy. That entails establishing the correct context and addressing traders’ issues and discomfort immediately earlier than discussing exit plans. The greatest approach to do that is to emphasize the way it’s in each events’ curiosity to put together for all attainable contingencies, defending towards draw back dangers whereas maximizing the upside potential. Entrepreneurs want to articulate that to ensure that them to create viable long-term strategic choices, they want to plan forward, collect knowledge, and check their hypotheses, simply as they do after they seek for product-market match or discover a go-to-market technique. The final alignment of curiosity between entrepreneurs and traders exists. Even when the objective is an IPO, having strategic acquirers on standby would solely enhance the IPO valuation. The nuance right here is in speaking the necessity for an exit technique clearly and inside the correct context.
Myth of entrepreneurial threat taking.
Many assume that as a result of innovation entails threat, threat mitigation methods would damage an entrepreneur’s underlying motivation to innovate. They fear that having an exit technique would make it too tempting for an entrepreneur to rush to a fast sale moderately than work by way of the hardships and attain for the celebs.
Those fears are misplaced. While there isn’t any proof in help of the declare that threat mitigation hurts innovation, there may be mounting proof in regards to the dangerous unwanted side effects of extreme threat and the toll the resultant stress has taken on the psychological well being of entrepreneurs, reminiscent of analysis into the connection between entrepreneurial stress and burnout in addition to the prevalence of psychological well being points amongst entrepreneurs. Innovation will not be solid in overburdened entrepreneurial brains; as a substitute, innovation is a results of repetitive, iterative, and inventive experimentation. Stress related to extreme threat solely makes success tougher to obtain.
A viable exit path not solely gives strategic optionality, it makes operating a startup a lot much less anxious due to a what’s often known as the “panic button” impact: believing one has the choice to escape a anxious scenario will scale back the quantity of stress really skilled in that scenario. While entrepreneurship essentially entails some quantity of risk-taking, entrepreneurial ardour and dedication neither springs from, nor grows stronger with, extreme threat. Instead, what motivates entrepreneurs is their conviction that they’re concerned within the creation of one thing that can have an enduring affect. Which is precisely what a viable exit path permits.
Myth of acquisition failures.
The media’s deal with acquisition failure tales has perpetuated a false narrative and fashionable false impression that almost all acquisitions destroy shareholder worth and fail to obtain their said targets. Anyone who’s below that impression, in fact, could be reluctant to significantly embrace the concept that promoting their enterprise is a viable path in the direction of achievement of their firm’s mission and achievement of their aspirations. But most acquisitions don’t fail. Any entrepreneur who needs to interact in critical deliberations about their exit technique with their stakeholders wants to be conversant in the precise knowledge and reply to any stakeholder skepticism about acquisitions.
I take the most effective proxy for measuring the success or failure of M&A transactions to be their recognition and the speed at which they happen, reaching report variety of offers in every of the previous 4 years. It is essential to be aware that acquisitions don’t simply occur primarily based on a whim. Much detailed evaluation and planning goes into the method with many individuals and approval ranges concerned on all sides of the transaction. And when dealmakers are requested to consider the success of acquisitions, they think about the bulk to have met or exceeded their expecations. Despite the favored acquisition failure tales, there are a lot of extra under-reported profitable ones reminiscent of these.
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To tilt the chances of success and survival of their favor, entrepreneurs want to devise and implement an exit technique lengthy earlier than they’re significantly contemplating a sale of their enterprise. The first step in that route 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 begin an trustworthy dialogue round their long-term strategic choices, the higher positioned they are going to be to affect and form the last word destiny of their startups.
