OK, I’ll admit it. I don’t usually like exit strategies. I really like people who are building businesses for the long run. I get excited when someone says to me, “I am building this to be a going concern.” And truth is, even if you want to exit by IPO or M&A, having a long-term going concern is the best way to get a high valuation.
But sometimes, as a consultant, I have a fiduciary responsibility to take the owners’ (which includes management, founders and investors) exit strategy into account. And the management has a similar responsibility. It has happened to me at least three times in the last year.
Here is an example. You are running a software company, and you are looking for a product growth and market strategy. It happens to firms (or at least successful ones) every single day. As it happens, there is almost never a patently-obvious, low-competition, desperate for a solution, easy-to-build product and easy-to-penetrate market just waiting there for you to take it. The best markets will always have some mix of pros and cons. Perhaps they are a great growth market, but there is already intense competition there. Or there might not be competition, but the right product will take 18 months to start generating revenue, either because of product complexity or because of long sales cycles. Or it might be wide open with quick revenue, but each customer requires a highly customized product, hurting your gross margins. The decision which markets to enter thus becomes a judgement call, hopefully a well-informed and educated one, but judgment and trade-offs nonetheless.
The choice of which market to enter can directly impact the value of the firm in 6 months, 12 months, 24 months and 4-5 years. You need to really understand where you want to be in those timeframes in order to help inform that judgment call.
To continue our example, let’s say you have a rocking new online CRM product. It makes Act! look like a baby’s toy, Microsoft Dynamics like a bike with training wheels, and Salesforce.com look like the biggest waste and boondoggle ever. (This is just hypothetical, I have no such product in mind.) You have already successfully hit 3 markets and are making some money. The choice of your next markets are among 2 potential contenders. Market A is competitive, and will generate $20MM of highly profitable revenue over the next 12 months, but lead directly into markets with over $1BN that will take you 24 months to crack into. Market B can generate $40MM short-term revenue, although somewhat less profitable, but do not necessarily open new markets, meaning you will need to heavily reinvest. On the other hand, market B is viewed as strategic to Salesforce, and will cause you to come on their radar as a concern.
If your long-term view is an independent, going concern, then market A is more important to you than B. On the other hand, if you view as a sale of the company to Salesforce within 12 months as an important exit path, then you need to seriously consider market B.
Of course, it is rarely that clean and clear-cut, but your long-term goals as owners need to be taken into consideration.