Every Founder Needs to Answer This Question
Not being totally honest with yourself about this might be the biggest mistake you will ever make.
“The freedom to make my own mistakes is all I ever wanted.” – Mance Rayder, Game of Thrones
I have an eminently simple philosophy when it comes to business and life; no decision is a mistake if you can look back on it with pride in knowing why you made it.
“…no decisions is a mistake if you can look back on it with pride in knowing why you made it.”
So, let me ask you a simple question: “What’s your ambition for your business?” Sounds simple enough, right? Here’s the good news, it’s a multiple-choice question with just three answers–wait, it gets better, all three answers are right! What’s crucial is that you pick one and then build every aspect of your business strategy around it. Vacillate between these and you’re, well, how can I put this kindly….you’re screwed! Yeah, that was a gentle but effective way to say it.
Here are your three choices:
- The Exit Strategy
- The Scale Strategy
- The Lifestyle Strategy
The Exit Strategy
The Exit Strategy has unfortunately come to be perceived as the only reason to grow a business. Surrounded by billion-dollar valuations of private companies, such as UBER, Snapchat, airbnb, and 100 others, we’ve all formed the impression that the goal is to be a unicorn. If an exit is what you want from the outset then go for it, but do so with the full realization that it’s like reaching escape velocity in a rocket; you either do or you don’t, there is no halfway point.
“If an exit is what you want from the outset then go for it, but do so with the full realization that it’s like reaching escape velocity in a rocket; you either do or you don’t, there is no halfway point.”
And while your building a unicorn keep in mind that you will be giving away the vast majority of your ownership stake, working for less than market, and working 24/7. I’m not trying to talk you out of an exit strategy. I chose the same route. I understand it well. I know its upside and downside on a very personal level. It’s a choice, but it’s not the only choice. Just make it consciously and in the full light of day.
The Scale Strategy
While The Exit Strategy may be the riskiest choice The Scale Strategy is actually the most ambitious one. (By the way, I’m including going public under this strategy.) With an exit there is an inherent expectation that you will get off the rocket and someone else will scale it. However, when you chose to scale you’re determined to build a large business. The economic benefits of this choice lead the pack–think Ellison, Gates, Zuckerberg, Brin and Page– but it comes with its own steep price.
“…the personal price for scaling is the highest of the three choices but it is also the most rewarding financially and it gives you the greatest opportunity for impact.”
When Oracle hit the one billion-revenue mark Larry Ellison, its founder and CEO, had to fire his entire management team and start from scratch with people who knew how to grow and run a billion dollar business. Imagine having to fire everyone who helped you build your business. Brutal? You bet. Necessary? Absolutely, if your obligation is to scaling the business. I have a good friend who built his company from zero to over 1 billion. He receives offers weekly to sell. They will have to pry it from his cold dead hands. His life is his business. In many ways the personal price for scaling is the highest of the three choices but it is also the most rewarding financially and it gives you the greatest opportunity for impact–if you can pull it off.
The Lifestyle Strategy
The Lifestyle Strategy is the most often overlooked model. Many people shy away from it, almost embarrassed to admit it’s what they’re pursuing. Let’s face it it’s not sexy. You don’t see lifestyle businesses touted on the cover of magazines. Your answer to my question is pretty mundane; ” “I want to create a nice lifestyle so that I can take it easy.” In today’s context of rampant exits it sounds like a pretty wimpy answer. Besides what about not having to work for 30 years by exiting after 5-10 years?
OK, let’s play this out a bit and crunch some numbers.
With a lifestyle business your objective is to get the business to spin off a set level of profit indefinitely. So let’s say that means a $500K yearly in your pocket. Assume it takes on average five years to get a business to that point and you can sustain that return for another 30 years. Don’t laugh. I know many people who have done just that. They have consciously structured the business so that it can run without their 24/7 involvement. Leaving out tax issues and how you invest that money, you end up with 15 million after 30 years.
“Nothing wrong with a 7-15 $mill windfall, but oddly enough, if it’s a viable business, the economics aren’t that much better than the lifestyle choice.”
To get 15 million in an exit you’d need to sell for at least 150 million. The reason is that you’ve given away 90% of it to investors and you’re still likely splitting the rest with a partner and key employees. Trust me on this the math is uncanny in its consistency. Founders walk away from a decent exit with 5-10% on a good day. It’s also taken you about 10-15 years to build that business during which time you’ve worked countless hours, barely seen your kids grow up, never been sick or taken a real vacation (Seriously, who has the time?), and for a good chunk of that time you’ve paid yourself far less than what your worth.
Nothing wrong with a 7-15 $mill windfall, but oddly enough, if it’s a viable business, the economics aren’t that much better than the lifestyle choice. And, by the way, some lifestyle business can also be sold if you plan correctly.
Look, whatever you choose, A, B, or C, all of this comes down to being honest with yourself about what your ambition is. I’ll be the last one on the planet to talk you out of that. But make the choice for the right reasons, those that drive you from your core, that you can look back on and be proud of, and I promise it will be the right decision for you.
This article was originally published on Inc.
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Tom Koulopoulos is the author of 10 books and founder of the Delphi Group, a 25-year-old Boston-based think tank and a past Inc. 500 company that focuses on innovation and the future of business. He tweets from @tkspeaks.