“An exit strategy is one of the most important aspects of starting a business because it gives you, the entrepreneur, a focus for your efforts and allows you to set up your entrepreneurial endeavor with the end in mind” — William Link, co-founder of Newport Beach-based Versant Ventures
William Link is a serial entrepreneur and investor. When he listens to a startup pitch, he assesses “the end” — the final payout to VC investors and shareholders. He does not consider the possibility of a business starting up, growing, stabilizing, and then continuing to just…exist. On the contrary, he assesses a startup’s profit potential and does so by looking at best possible exit strategies which include (1) selling the business, (2) merging the business with another, (3) listing the company and selling shares to the public, or (4) selling the company’s assets. William Link is not the only one who views the startup world this way. In fact, most people think of startups and ventures as fleeting structures within the larger life of a business. Startups are means to a merger, acquisition, or occasional(ly rare) IPO. In my opinion, impact investing is a way to go against this mindset and extract the notion of growth and exit which is usually baked into every startup lifecycle. Impact investing provides a platform to assess a company based on more than just the sell-out and incentivizes businesses to grow with caution because of the social and environmental benefits of being a small business.
An example of a long-time small business that has a significant impact on its community is Mel’s Café in Charlottesville, VA. Opening 30 years ago, the restaurant has become an integral part of the community. Owner and operator Mel Walker says, “in the beginning it wasn’t an area college students and well-to-do people were advised to visit. […] Back then I mostly served folks from the neighborhood, but over the years we built up a reputation and we get people from all over the place coming here.” Though Mel’s Café is not looking to expand to different cities, it’s existence provides utility regarding economic development and community building.
Having said this, I want to stress that I by no means mean no growth is better than growth. Businesses can consciously expand and some should to boost revenue and scale impact. An example of this is New Belgium Brewing, a $225 million-generating B Corporation. The beer company is entirely owned by its employees through a stock-ownership plan. Rather than trying to grow as big as possible as quickly as possible, the company has focused on becoming standouts in their industry. Clearly, this model can work — currently, New Belgium is the third largest craft brewer in the United States and yields high impact results.
To move away from the chase for growth and exit, we need to undergo a significant paradigm shift within the business world. We need to force ourselves to look at a company and not be prone to ask, “Where are you expanding to next?” Instead, we need to focus on sustainable business development where impact is at the forefront of this discussion.
Another big piece of the puzzle is changing the way we finance a startup. Every business needs capital. During pre-revenues stages, money usually comes from the three Fs (Friends, Family, Fools). Angel investors are usually the first outside investors and typically provide capital for the product development stage. Once the startup has identified a dependable and growing revenue stream, it might attract other Venture Capital money. Most angel and VC investing is equity-based, meaning a company shares are sold to investors in the form of stocks. The problem with this is that these investors can only receive a return if a startup IPOs, merges, or is acquired. As a result, a tremendous pressure for rapid growth is put on the individual entrepreneur. Royalty financing, whereby investors receive a percentage of revenues, provides a promising alternative for this. This method of raising money relieves the entrepreneur of the pressure early equity investing creates to grow rapidly towards an “exit” and avoids dilution of the original owners.
This discussion is all part of a larger question — what is the purpose of business. If it is purely profit-based, the conversation regarding growth and exit is a waste of electronic ink. However, if the purpose of business is more holistic, if it encompasses social as well as financial goals, then we need to rethink the startup life cycle.