Episode 20: Exit Strategies
So, what’s your exit strategy? Isn’t that kinda’ like the question kids get from adults, you know the one, So, what are you going to do when you grow up? Are you going to start and run your business forever? Are you going to take it to a point and cash out? Do you really need to think about it up front or can you just do everything else right to start and grow your business and worry about whether and how to exit from it later? Doug and Glenn have a few thoughts on this and Glenn shares a story about a guy whose innovation will make you pee.
Transcript
Glenn Suart 0:00
Exit strategy is a nice long term thing, but you do have to think about [it at] the beginning. But don’t think about how you’re going to spend your millions when you cash out now, just think about the structure of what would happen in the future so when you get to that point… you get your millions down the road.
Doug Ross 0:27
Welcome to Conversations on Startups, a podcast brought to you by Douglas Ross, author of the book, Spark Click Go: How to Bring Your Creative Business Idea to Life, and Glenn Suart, of Today’s Great Idea, a radio series featuring over 300 origin stories of businesses, brands and inventions that have changed the culture. Welcome to today’s conversation.
Doug Ross 0:50
Welcome to another episode of conversations on startups with Doug and Glenn. I’m Doug Ross, author of Spark Click Go – experienced corporate guy, entrepreneur working with a startup right now… [I] help people to move their startup forward. And I’m joined here with my friend Glenn, how ya doing, Glenn?
Glenn Suart 1:11
I’m doing great, Doug. As you know, I’m Glenn Suart, from Today’s Great Idea in Canada, and we focus on helping people start great ideas… taking [their] great ideas and turn them into something special. Today, I think, Doug, we’re going to talk about exit strategies. And they’re a big issue that people don’t really think about, until it actually happens. They have an offer on the table, and they’ve come like, oh, Maybe that’s what we should do. The best time probably to think about exit strategies [is] at the beginning so at least you have an idea of… when somebody comes along whether you want to do it or not.
Doug Ross 1:47
Yeah, I think that is a good idea to do. I see some people do it. I know some people get upset about this too,or a little bit put off. You’re starting your business, and you’re already thinking of an exit. So there’s a philosophical piece to do with this. What are your thoughts on that? Does it bother you in any way or can you see the argument?
Glenn Suart 2:11
I see the arguments the whole way. If you want to create something that’s going to last for… forever, to some degree – it’s going to probably outlast you as an owner. So you want to structure it as best you can so that it’s handled right at the beginning. Things don’t always work out. But you got to think about what you want to do. Do you want to sell it to a third party? Do you want to keep it forever? Those things should be part of the plan because it’ll impact how you structure the business at the beginning, and where you spend your efforts. That’s my feeling, you?
Doug Ross 2:41
I agree, I think it does make sense to think about it. I’ve seen it as well in pitch decks where some companies will talk about it right up front, and they use it as a lure, I guess I would say, to potential investors. This is our possible exit strategy, we’ve identified similar companies to ours, and they exited at X amount of money after Y amount of time. And they maybe even have identified some potential buyers as well. So I have seen it used in that fashion. [Yep] So I do see it as a positive thing. Just before we go too far here, Glenn, one of the things we try and do is define what we mean by exits. What kind of exits are we talking about? What are the options?
Glenn Suart 3:28
Oh that’s really good. It’s an obvious question, isn’t it?
Din 3:32
You’re listening to Conversations on Startups with Doug and Glenn, thanks for joining us. Let’s get back to the show.
Glenn Suart 3:40
To me an exit is… you’re the founder or the person really serious in the business, and [how] to leave the business, or how are you on behalf of investors going to leave the business at some point down the road. That could be 100 years or 50 years from now, it doesn’t have to be tomorrow. But you have to understand where you’re going, and whether you want to sell your baby to somebody else or not. That’s what I think.
Doug Ross 4:11
Well, yeah, no, I agree with that. I just think there are some classical types of exits that we should lay out for our listeners. So you do have that acquisition, which could be from another company, a strategic, some people call them, or could be a private equity group that might acquire your company. So that’s one way to exit. And other classical way would be to go public, to do all the work you need to do to list yourself on an exchange and bring in public investors. And of course, there are innovations on that that we see now including special acquisition companies or SPACs [yep] that are designed to acquire companies. And there’s one that we don’t talk about maybe so much now but you and I… sure we had numerous case studies on this when we were studying this together at business school – but [a] managed or [a] managers buyout, that kind of thing could be an exit. I think those are three of the major ones, or selling your shares even internally is another way to do it, [or] buying out your partner.
Glenn Suart 5:16
Yep, there’s a whole bunch of different factors. And you’re absolutely right. Understanding the mechanism is critical. And all those ones are the obvious ones…
Doug Ross 5:25
The obvious positive ones.
Glenn Suart 5:29
Ya, that’s right. The one exit strategy – you’re outta business – that’s not so good.
Doug Ross 5:33
We’re trying to avoid that.
Glenn Suart 5:35
Well, I got a story here to tell you about an interesting exit strategy. It’s more… it’s more a fun one than anything else, but see if you can guess which company I’m talking about and how the founder exited the business. [Ok] So this guy named Robert is a physician. He’s a university professor in Florida, and he’s an inventor. And one day, you know, it’s a hot, humid day, at the university, an athletic coach stopped by and wondered if Robert could help him with a problem. And [the problem] is that his players – because it was so hot and humid – couldn’t urinate. So Robert got his team together, and they figured out what the problem was. And they came up with a solution which they called, after himself, Cade’s Cola. It tasted awful, but it worked really, really well. The team tried it, and it worked so well that the University team became well known for being a second half team in football. It worked so incredibly well, by the end of the year the team won the Orange Bowl. And so, Robert knew what he wanted to do. And his idea was to get the university to… to give the whole formula to the university if they just backed the commercialization of it. And despite all the success, the university said, No. So he took… he got a patent he… he raised some capital and started to produce the cola. And then the university realized their big mistake and basically worked out a deal with him. So today, Cade’s cola is sold virtually everywhere. And in the process the university has earned over $200 million in royalties from this drink. Any idea which drink I’m talking about?
Doug Ross 7:20
Well, I can only really think of Gatorade.
Glenn Suart 7:24
And that’s exactly what it is. And it’s called Gatorade, because the University of Florida Gators. That’s what it was named after. [Makes sense] But, the exit strategy portion was… he did not want to run the business, so he sort of got pushed into it, because he knew there was some value in this solution that he came up with. And then, when it was taking off, he really wanted to give back to the University of Florida. And so he made that part of his exit strategy to get… to make sure that they got a royalty from everything they do. And today, Gatorade is now owned by Pepsi, and the University of Florida still makes money from it.
Doug Ross 8:01
That’s a great story. I like the give-back portion of that. That’s a really great example and doing it through royalties.
Glenn Suart 8:09
That brings up a question that I don’t think people really think about too much, but when you think about exit strategy, it’s more than money, isn’t it, Doug? Exit strategy is not just about money. It’s about a whole bunch of other factors, seems to me.
Doug Ross 8:23
I think so too. A ton of factors. Giving back is one, how you want to spend your time as an entrepreneur is another one. That story – I think it’s a good example of… that person didn’t want to run a business. What if you’re a serial entrepreneur, you may realize, and let’s say you’re an inventor, but you don’t have to be, you just are starting these businesses getting them going. Maybe that’s the sweet spot for you. And so your time is best spent doing that. Therefore, start things, get them going, have an exit, move on. Wash, rinse, repeat.
Doug Ross 9:04
Hey podcast listeners, we’re gonna take a short break now. If you’re enjoying the show, feel free to invite your friends, remember to subscribe, and if you want to help spread the word leave us a review on Apple Podcasts or your favorite podcast app. Each episode of Conversations on Startups focuses on a single topic. If you want to comment on something you’ve heard on the podcast, or suggest a topic for us to cover in a future episode, send an email to:go@todaysgreatidea.com or douglas@sparkclickgo.com. Glenn and I appreciate you and hope you find our uncut and unrehearsed stories, perspectives, and tips helpful. Speaking of helpful stuff-let’s pick up where we left off.
Glenn Suart 9:49
You have to think about these things, I find, ahead of time. If legacy is important to you, as it is to some people, you got to plan for that. If you’re going to sell it to an investor or to your employees, that’s really important, because you have to structure those things right up front. So, to me, the question you asked earlier, is, you have to think about your exit strategy at the beginning, because investors or others are going to want to know what you’re thinking about for the long term. Lots of people who want to put money in aren’t interested in the long term, they just want to flip it maybe. So they’re the wrong investors to have in your business if you want to go long term. It’s really important that your… your interests are aligned amongst yourself and your investors.
Doug Ross 10:32
Yeah, totally agree. I was thinking before our call today about who wants these exits and investors… that was the number one group that came up in my mind as wanting these things. You…you just mentioned it…they’re maybe not quite speculators, some of them are, but they just want a quick exit. They need the liquidity, that’s where they get their return on their investment. And they move on. So I love the thinking, make sure you’re aligned with your investors, that makes a lot of sense. Founders are another group that typically want exits. Doesn’t mean an exit where they can’t have some of those things that you mentioned beyond just the financial. Many of them do, though, just want the financial, and that’s fine – it’s a great return on investment. We’ve seen some of these folks take an exit and the proceeds from exits and turn it into something even bigger. Elon Musk would be a perfect example of that with PayPal… and then he sold that and we know what he’s done since. So, you know, there are those motivations as well. If I think about it from a founders point of view another benefit of having an exit is reputation. So if you’ve had a successful exit this now is your calling card for your next venture. And investors will crawl over each other to get to serial entrepreneurs with successful exits.
Glenn Suart 12:00
Yep. And that’s exactly what people are investing in, people. And so they want to know that you’ve had some success. And that’s… if you’ve exited, well, that’s terrific. They know that you’ve gone through the process, you know the challenges, it’s a good thing. No, I think this is good. Exit strategy is a nice long term thing, but you do have to think about [it at] the beginning. But don’t think about how you’re going to spend your millions when you cash out now, just think about the structure of what would happen in the future so when you get to that point… you get your millions down the road. Now, just think about the structure of what would happen in the future so when you get to that point, and you get your millions down the road, or you’ve structured the right way to get those millions the proper way.
Doug Ross 12:36
Yeah that structure is so important. And one of the aspects of that is, what are you giving away as you bring in investors early? How much equity have you given away? That’s going to have a big impact on what your takeaway is… some of these other things that you mentioned, the way you structure at the beginning, how much you water down your own equity stake, I think that’s important. Do you look for an exit in the public markets? Or do you do something else, I think these are great. The other piece of advice that I think is important here, too if you want to have a successful exit – hopefully, we’ve been covering a lot of these topics over the weeks during these conversations on startups – but, another way to position yourself the best you can for a successful exit is to focus on the here and now; your product, your customers, your business model, all of the things that we’ve talked about in terms of building your business and building something that’s going to be valued in the market and sustainable. This will put you in a great position for choosing your exit path or at least having greater influence on your exit path.
Glenn Suart 13:47
I would also say on top of that, one thing to consider when you get closer to actually activating your exit strategy is to bring in experienced people to ensure that you are in fact doing the right thing at that time.
Doug Ross 14:05
Are you talking about lawyers here, Glenn?
Glenn Suart 14:06
Lawyers and other financial consultants to make sure you understand the implications of the exit strategy you’re doing. If you go public, for sake of argument, that’s wonderful but there’s… going public brings a whole set of conditions on top of it you may not have thought about. There’s taxes, there’s trusts… a whole bunch of things you have to think about. So, you might be thinking you’re going to have some success with that particular exit strategy, but you may not have the experience to realize it may not work quite the way you want it to work. So, before you do anything with an exit strategy, yes, come up with something that makes sense, but then talk to people who are experienced about that kind of exit strategy and see if you haven’t made a wrong assumption somewhere.
Doug Ross 14:53
No, I think that’s a great idea. So the the accountants and the bankers that have done this… the investment bankers, possibly, that kind of thing. [I} think that makes sense. So being a public company is onerous, preparing to become a public company and being a public company is onerous in terms of reporting requirements as well as time that’s necessary and dedicated resources other than just the financial to be a public company. Also to consider in some of these exit strategies, [is] if you’re acquired by somebody, let’s call them White Knight, Incorporated. So, White Knight, Incorporated wants to buy your startup because you’ve had some good traction, they may as a contingency on the deal, say to you, Hey, Glenn, I would like you to stay, and, in fact, this deal is contingent upon you staying for three years to manage the growth of this company.
Glenn Suart 14:53
Yeah. You may not assume that when you were selling the company. You’re already going to be in Tahiti at that point. So…
Doug Ross 15:07
Ya, counting your money. [That’s right] And drinking Mojitos.
Glenn Suart 15:43
…making sure the assumptions are all there and you can live with the right solutions at the end of the day.
Ben 16:09
You’re listening to Conversations on Startups with Doug and Glen, thanks for joining us.
Glenn Suart 16:16
So lots to think about with exit strategy. But the good thing is, think about it early on because people are going to want to know what you’re thinking. That would be my summary of this.
Doug Ross 16:26
Yeah, you should have an answer to the question, What’s your exit strategy? Completely agree and thinking of our exit strategy, Glenn, as we exit this episode of Conversations on Startups, with Doug and Glenn …
Glenn Suart 16:40
That was a great pivot, that was a great pivot, Doug.
Doug Ross 16:42
Oh, a great pivot.
Glenn Suart 16:44
When we say, pivot, what does that mean for the listener?
Doug Ross 16:48
So here, we’re talking about a shift a significant shift from how you started the business. It could be with respect to your product or service, or it could be which customer group you’re going after that kind of thing, something significant that you are thinking about doing because Plan A is not panning out.
Glenn Suart 17:15
It’s panning out, but it’s not doing as well as something else. And you always should be looking for something else. And the story we talked about before is WD 40. Where, you know, Norm, the owner was basically trying to prevent rust on rockets… invented WD 40, and that’s great. But it’s a small, limited industrial market, when he realized that the staff were stealing the stuff and taking it home and using it on a whole bunch of hardware and bikes and stuff. That’s when he realized that pivoting to a retail model would open up a whole new market. And it did, you know, it’s a billion dollar a year company… does one thing. So pivoting is understanding that an opportunity is there. It’s not just a negative. We’ll talk about that in much more detail next week. I’m Glenn Suart in Canada.
Doug Ross 18:04
I’m Doug Ross in the United States.
Glenn Suart 18:07
We’ll see you next time.
Doug Ross 18:18
Conversations on Startups is a production of Glenn Suart and Douglas Ross. We hope you’re having fun listening but mostly that you take action on your business idea. For more inspiration visit our websites: todaysgreatidea.com and sparkclickgo.com. Another episode of Conversations on Startups will drop soon, or is already available to binge. Thanks for joining us, and remember to subscribe and invite your friends. See ya next time!
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