Acquisitions are a much more common end point for startups than IPOs. So why is no one talking about them? There are five common myths and biases that get in the way and keep founders from thinking ahead: the optimistic bias, the present bias, signaling failures, the entrepreneurial risk-taking myth, and the failures myth. acquisition. Understanding them and knowing how to fix them can ensure founders have the widest list of options possible and aren’t left in the dark when an acquisition deal is suddenly on the table.
For every IPO there are more than 30 acquisitions each year. But while almost all entrepreneurs and their board members know that an acquisition is the most common fate of a successful startup, they rarely strategize on a potential sale. Instead, they only get serious about exit planning when their startup desperately needs to sell or has incoming interest from an acquirer. As a result, they miss out on important strategic opportunities or end up with a suboptimal outcome.
The only way out of this unfortunate situation is for entrepreneurs to devise an exit plan early and lay the groundwork for a potential sale to acquirers long before a sale is imminent. Acquisitions can take years to materialize. In my own experience as a founder, a lack of early exit planning led to the demise and liquidation of my first startup Jaxtr, an up-and-coming communications solution founded in 2005 with top-tier venture capital backing and a large user base.
However, if exit planning is so important, why is it so often neglected? The short answer is that a number of myths and biases about selling a business have made exit planning discussions taboo in the startup community. And since creating and executing an exit plan is not a solitary effort and requires close collaboration with key stakeholders (senior leaders, board members, major investors), this taboo effectively shuts down any exit planning initiative before let it begin.
Why don’t we talk about exit strategies?
Understanding the myths and biases underlying this taboo, as set out below, will enable entrepreneurs to overcome it, take charge of their destiny, and unlock their startup’s potential and hidden strategic options.
Optimism fuels entrepreneurship, but it can also give rise to a false sense of confidence and create strategic blind spots. Most entrepreneurs know that any startup’s chances of success are slim, but they don’t consider themselves bound by those statistics. In a survey I conducted of nearly 30 early-stage founders in the fall of 2021, more than 90% agreed that less than 25% of all startups will succeed, based on general startup statistics. But when I asked them what they considered their own probability of success to be, their answer was much closer to certainty, showing that our business optimism can simply blind us to our own reality. As a result, entrepreneurs are overwhelmingly focused on the least likely outcome: taking the company public.
The problem with this perspective is that no entrepreneur can make adequate strategic plans and overcome obstacles in his path without a realistic view of his future prospects and the nature of those obstacles. To keep this blind spot in check, entrepreneurs need to take the time and create a long-term plan that reflects the realistic possibilities of an IPO vs. strategic sale as the ultimate destination for their new businesses. And they should periodically review and revise this plan as they gather new data on their own progress, changes, and consolidations in the industry, as well as evolving market conditions.
In general, we tend to show a bias towards the present, prioritizing short-term results over long-term results and significantly discounting future risks and benefits. Because employers spend their days fighting multiple fires and face significant resource constraints, they are especially prone to this bias. Strategic planning is considered a luxury by many entrepreneurs. This may explain why 70% of my survey respondents spent little or no time creating an exit strategy and 60% felt unprepared to respond to an acquisition interest. This current bias creates strategic debt that builds up over time and can cost entrepreneurs their business. We can’t improve what we don’t pay attention to, and delaying conversations and considerations related to a strategic exit leaves entrepreneurs unprepared for the most defining event in their startup’s lifecycle outcomes: its sale of exit.
Venture investors tend to be attracted to mission-driven entrepreneurs who have the courage to take big risks and aspire to build businesses at scale. In addition, they expect entrepreneurs to have an unwavering commitment to staying the course in difficult times. Since all startups go through difficult periods, without such a strong determination among the founders and leadership, it would be nearly impossible to turn things around and survive. As such, investors don’t like founders who show signs of a mindset made for change: They worry that these people lack the resilience and perseverance to innovate and navigate the inevitable obstacles in their path and end up selling their business too quickly. or prematurely. Lose the hope. The result of this is that investors generally avoid engaging in serious discussions about exit planning with employers.
However, by understanding this aversion, entrepreneurs can take the right approach. That means setting the proper context and addressing investor concerns and discomforts head-on before discussing exit plans. The best way to do this is to emphasize how it is in both parties’ interest to prepare for all possible contingencies, hedging against downside risks and maximizing upside potential. Entrepreneurs need to articulate that in order to create viable long-term strategic options, they must plan ahead, collect data, and test their hypotheses, just as they do when searching for a market-appropriate product or exploring an option. -market strategy. The maximum alignment of interests between entrepreneurs and investors exists. Even when the goal is an IPO, having strategic acquirers on hold would only increase the valuation of the IPO. The nuance here is to communicate the need for an exit strategy clearly and in the right context.
The myth of entrepreneurial risk taking.
Many assume that because innovation involves risk, risk mitigation strategies would harm an entrepreneur’s underlying motivation to innovate. They worry that having an exit strategy will make it too tempting for an entrepreneur to rush into a quick sale rather than push through the hurdles and reach for the stars.
Those fears are misplaced. While there is no evidence to support the claim that risk mitigation harms innovation, there is growing evidence of the harmful side effects of excessive risk and the toll the resulting stress has taken on the mental health of entrepreneurs, such as the research on the connection between business stress and burnout, as well as the prevalence of mental health problems among entrepreneurs. Innovation is not forged in overloaded entrepreneurial brains; instead, innovation is the result of repetitive, iterative, and creative experimentation. The stress associated with excessive risk only makes success more difficult to achieve.
A viable exit path not only provides a strategic option, it makes starting a startup much less stressful due to what is known as the “panic button” effect: believing that one has the option of escaping from a stressful situation will reduce the amount of stress actually experienced in that situation. While entrepreneurship necessarily involves a certain amount of risk-taking, entrepreneurial passion and commitment are not bred or strengthened by excessive risk. Instead, what motivates entrepreneurs is their belief that they are involved in creating something that will have a lasting impact. Which is exactly what allows for a viable exit route.
Myth of acquisition failures.
The media focus on failed takeover stories has perpetuated a false narrative and popular misconception that most takeovers destroy shareholder value and fail to achieve stated objectives. Anyone with that impression, of course, would be reluctant to seriously accept the idea that selling your business is a viable path to achieving your company’s mission and fulfilling your aspirations. But most acquisitions don’t fail. Any entrepreneur who wants to engage in serious deliberations about his exit strategy with his stakeholders needs to be familiar with the real data and respond to any interested party’s skepticism about acquisitions.
I believe that the best indicator to measure the success or failure of M&A transactions is their popularity and the rate at which they occur, reaching a record number of deals in each of the last four years. It’s important to note that acquisitions don’t just happen on a whim. A lot of detailed analysis and planning goes into the process with many people and levels of approval involved on each side of the transaction. And when negotiators are asked to assess the success of acquisitions, they find that most have met or exceeded their expectations. Despite the popular stories of acquisition failures, there are many more successful ones like these that go unreported.
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To tip the odds of success and survival in their favor, entrepreneurs must design and implement an exit strategy long before they seriously consider selling their business. The first step in that direction is overcoming the exit taboo and opening the channels of communication with your key stakeholders. The sooner entrepreneurs can overcome these myths and biases and begin an honest dialogue about their long-term strategic options, the better positioned they will be to influence and shape the ultimate destiny of their new businesses.