The Exit (why VCs don't own sports teams)

A photo of an exit sign

Over the last four years, I have had four exits per year. Wow, right? Except that an "exit" doesn't necessarily mean a positive one. Thankfully, most of mine were positive. As an investor, an exit is not a super emotional event. If we make a great return, our investors say "thanks for doing your job." And if we don't, they question whether they want to invest in our next fund. Either way, it is not a major personal life event. But for an entrepreneur, the exit is a major milestone. The reality is that VCs do pretty well financially when there is a win, but the entrepreneur does amazing. The entrepreneur can go off and buy a sports team. VCs can't afford one.So when things go amazing as an entrepreneur (IPO), you buy a sports team. When things go terribly, you shut the business down and go get a job or start something new. These two options are easy. A "win" gives you lots of options and time. A "loss" provides limited options and very little time. But most frequently, an exit is somewhere in the middle. Today I am going to outline some exit options that are "meh." These are just a few that I have experienced. I am sure there are more.

Get a job; your startup is now a side-hustle: The startup has little to no capital left but you think it is still a good idea. This situation should typically be that the startup just needs more time to get product-market fit. Ideally, you get a day job that isn't very demanding. If you get a sales job, you will likely never have time to work on your side-hustle. A nice academic, big corporate, or government job where you are an individual contributor is ideal. If the job is in a space that could be strategic to your startup—even better. I have only seen this work when the day job is a good job and not a great job.

Acqu-hire: In lieu of shutting down the business, you find a buyer who is mostly interested in hiring your team. The benefit to the acquiring party is that overnight they have a functioning team that knows the industry. Here is how the valuation is rationalized: think about how long the team has been functioning together, and the cost for the acquirer to recruit. I use a simple formula. Add up the total payroll of the team and how long they have been functioning together. The low number is the total annual payroll X 25% (basically, what recruiters charge). The high number is the total monthly payroll X the number of months the team has been functioning together. The way you maximize this exit is by understanding any deadlines that are important to the acquirer.

Merge with another startup: If you watch horror movies, then you know that there is generally safety in numbers. In the world of mergers and acquisitions, they like to use the term "synergies" to describe a strategic merger. Like if a peanut butter company merges with a chocolate company to start making Reese's Cups. Separately delicious; together divine. They use terms like “1+1=5.” For two startups to merge, it typically is “1+1=1.” Why? The "1" is because we tend to round up. The merged company should be stronger and better resourced than either company was individually. These can be super complicated if there are outside investors. However, they are very doable. Most VCs do not like these types of deals. I happen to love them.

Pivot to a consulting business and put your product on the shelf: You have likely spent several years in the market talking to potential clients. Maybe you have run out of money to complete the product. Essentially, what you do here is take your incomplete product, call it a proprietary toolset, and start a consultancy. The great thing about consulting is that it can create near term cash flow quickly and can fund the completion of your product. This is very difficult for most VC investors to stomach, and they won't be happy. Your angel investors won't care. If you choose this path, your startup is no longer a venture-fundable technology company. But it can definitely be a great profitable business.

I am sure I missed some options. If you have any others to share, let me know and I can add them to this list.

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