The startup and its founder lives are intertwined in inexplicable ways. Hence the founder’s mindset and decisions at key stages of business growth can literally “make or break” its future.
Business growth is like a Hollywood movie with its own intrigue, tensions, turning points and critical choices for the hero. That means founders need to make right decisions at the right time. A Spiderman should not attempt to jump from a building to save lives before he gets his superpower. However, for startup founders business growth stages and challenges are less obvious. But the impact of wrong decisions is not less dramatic than for major blockbusters.
That being said, not all businesses need or will go through all growth stages. Some will never make it to the next level. Others will fall back to the previous one. Few will intentionally limit future growth. Finally, one out of 10 startups will survive and thrive. So let’s see what challenges and decisions founders face at each match point.
Stage I: Inception
Objective. This stage starts when the entrepreneurial “seed” idea is planted. The goal is to understand whether this idea is worth pursuing.
Founder mindset. Usually, there is a lot of hesitation. What is the dream and what is the reality? Many first-time founders have issues to admit they consider starting own business. Some will continue having a day job, calling the idea a “side hustle”. But honestly, it’s more than that. Simply the idea is so uncertain that it’s scary to act on it. At least 25% of start-up founders admit that they suffer from the imposter syndrome, but many may not be aware of it. Unfortunately, our society, families and friends are not always supportive at this stage, not counting a negative self-talk. Thinking that someone could the job better, that people will not pay for your idea, that investors will not take you seriously could be dreading. But the opposite could also happen: a founder could be so in love with their idea that it starts feeding unrealistic expectations of overnight success. The hard truth is that there is no overnight success. Ever. So the best mindset for this stage is self-awareness.
Tension. The major tension here is between the perceived security and the unknown. So it’s worth remembering a famous J. Krishnamurti quote: “One is never afraid of the unknown; one is afraid of the known coming to the end”. Founder need to take a conscious decision to end the “known” is a deep personal tension.
Value drivers. As this is an Inception stage, the business equals the founder. So the value comes from mindful personal choices.
- Passion. One crucial indicator of idea’s potential for success is that it makes you tick. Developing business is a long journey. Your passion is the fuel that never runs out. So do not start the road with an empty tank.
- Solvability. Make sure you can financially support yourself either through own funds as 75% of founders do, or by leaning on partner/family support. It will be safe to assume a negative cash flow for at least 6-12 months and strategize about the ways to mitigate it before you start.
- Support. It is one of the key success factors to have a support circle in case your energy goes done, because from time to time it will. The circle could include your close friends or family, but also mentors, freelancers, partners or co-founders who may help to fill up the skill gap, if needed.
Strategic decision. The choice here is simple: go ahead to the next phase or leave the idea aside. My North Star for making that decision is passion and risk tolerance. If you are truly passionate about the idea and are willing to accept uncertainty, it’s worth to give it a try.
Stage II: The Butterfly Effect
Objective. The title says it all. At this stage there will be a lot of trial and error, pivoting, adjustment, and lessons learned. The goal is to validate the product-market fit.
Founder mindset. The business is still pretty much dependent on the owner’s involvement and energy. So one of the most crucial things for the founder at this stage is … not to get burned out. It could be achieved by setting boundaries, both for yourself and the others. You simply can’t do everything on your own. According to the Entrepreneur, startup founders spend around 40% of their time on tasks that do not generate income, such as payroll or administrative tasks. Focus on the essential both in your life and your business. Outsource or let go of the rest.
Tensions. There are two main tensions at this stage. The first one is certainty vs uncertainty. However, here there is no real choice anymore. You have to get out of your comfort zone. Playing is safe is not an option at the “Butterfly Effect” stage. Most likely you will first discover the things that do not work before realizing what works for you. No matter how experienced you are, you’ll need to accept failure as a part of the process. “Fail fast and move on” should become your motto. Just do it in a way that does not kill your business.
The second tension is between own idea and the market feedback. You may very excited about your idea, but if nobody buys it, it will not translate into a viable business. So if you want to make money, you have to get market traction at this stage. Therefore, it is important to listen to the market feedback. You can do customer surveys, offer your services for free in exchange for the feedback, do A-B testing, pre-sell etc. Do not stress out about making money immediately. Focus on the idea validation and the money will follow.
Value drivers. Based on the market feedback, you need to iterate towards real customer needs. But chaotic iterations are time, money and energy consuming. In order to avoid that, be guided by the major value drivers and use Free Resources for the support, if needed.
- Product-market fit. This is the first and the most important driver at this stage. It is crucial to understand who your target customers are because only they will pay for your product or service. You may want to use the following questions to validate your assumptions.
- What is a real-life problem for real people that you are solving?
- Who are the people that are affected by this specific problem?
- How big and important is this problem for them to pay for it?
- How urgent is it for them to solve it to deal with it now?
Your first assumptions are likely to be wrong. That’s OK. You just have to pivot based on the feedback received and start the process over again. However, you need to distinguish between the feedback and the customization requests. Feedback is a wiliness to purchase your product or service or a lack of it. In any case, it is important to understand “why?” Then you can iterate further.
Customization is “nice to have” requests from the customers. They like the product and have committed to buy it. They just want some changes: configuration, user interface, scope, functionality, support or payment terms etc. At this stage, it is tempting to say “yes” because we want to delight the customers. Minor adjustments are fine and can help you to build a customer base. However, if a bigger adjustment is requested, ask yourself if this is useful for more than one or two customers. If yes, you can incorporate it in the product roadmap. If not, think twice before accepting this request. Too much customization adds costs and complexity to your product, its sales, marketing and future support. So you have to weight those factors in to understand the real benefits for you of satisfying customer’s request.
2. Value proposition. Once you know what problem you solve and for whom, you need to understand how you can help. Your offer could assist customers in overcoming a major hurdle, such as lack of time, money, extra weight, unemployment, health issues, lawsuits, etc. Alternatively, it could help them to realize important gains: personal development, business growth, travel, healthy organic food, acquisition of new skills, building or decorating a new house, etc.
The marketplace is crowded, so you need to stand out. For that, leverage your strengths and creativity. Nobody else has exactly the same background, experience and way of thinking. Listen to yourself, not others, to find a unique solution to customer problems. Remember Henry Ford: “If I had asked people what they wanted, they would have said faster horses”
3. Business model. How do you make money? Your business model needs to be consistent with your value proposition to the target customers. The puzzle starts with identifying the target customer, to whom you bring value via products and services, by using the resources you have. If you calibrate those elements correctly, the customer will perceive enough value in your offer to pay the price that covers your costs and allows for future growth.
Experiment with different models depending on your offer: subscription, freemium, licensing, franchising, white label, razor blade, etc. You can even invent your own or test a hybrid model. The important thing is that your business model allows you to earn money in a consistent way.
4. Team. As your business grows, you will need to add resources to support it. But as the “Butterfly effect” stage is full of unexpected turns, strive for a balance between sufficient bandwidth and risk. Bad hires add significant costs at this point. By bad hires I mean everything from unnecessary to unsuitable ones. It is not the most experienced employees who add the most value. According to Harvard Business Review, startup teams with high level of previous experience but average to low levels of passion and shared purpose were overall weaker than their competitors.
So my advice would be to start with a motivated core team and add external resources if and when needed.
5. Financing. Do you need to raise money? Not all companies need high investment at this stage. Tech companies would require external financing, but even they should try to first develop and sell just a minimum viable product (MVP). If you decide to fundraise, factor in at least 8-10 months for the first round. But frankly, unless you have an impressive address book of VC contacts, you could be better off seeking grants, angel investors, small business or personal loans and alike. Once you raised funds, only spend them on core activities. Delay other expenses for later when you will be able to finance them from your operational cash flow.
6. Market environment. Keep your finger on the pulse of market trends. They reflect potential unserved needs of your customers. It could be done through market research, but also by analyzing inputs from your sales, support and other front-line teams. Obviously, the most valuable channel of information is speaking directly with your customers, hence many founders spend time building customer relations.
Competition monitoring could also provide valuable insights into future market development. Rest to add regulations as well as macroeconomic environment, such GDP, inflation, interest rates, unemployment, consumer spending, raw material prices etc. All the above paints a fair picture of the industry direction and helps you to decide where to invest your money and other resources.
Unfortunately, many start-ups fail during the “Butterfly Effect” stage. Even the most creative ideas with millions in funding are not immune to failure. Although specific reasons for failure vary, the common denominator is lack of reactivity to the market feedback. Let’s look at the infamous Quibi example that conveniently summarizes all major challenges any startup may face in their early years.
Quibi unrealized growth case study
Quibi was a mobile short form streaming service of video content. Founded in 2018 by entertainment industry veterans, it raised $1.75bln in two rounds of funding, hired 250 employees, but failed to get traction for its paid subscription service and went down within 6 months after its launch.
Let’s see how Quibi acted on the value drivers and what issues did that cause.
First, raising capital before figuring out product-market fit was not a good idea. Famous founder names served as a collateral for the investors. However, the target customers and their needs were vague: “25-35-year-old adults”. Lots of those people could consume short content on-the-go because of different reasons. The company failed to understand why these people would want to watch movies and shows on their mobile during “in-between moments”. And more importantly, why would they want to pay for it, when they have so many free alternatives: YouTube, TikTok, Instagram etc.
Second, not surprisingly, there was no clear value proposition. If we were not sure whom we serve, how would we know what to offer? Quibi started to commission lots of content, but without a strategic direction. As a result, it ran into a wide range of competitors starting from YouTube and going to Disney Plus, Netflix and HBO Max. In such a crowded market space, partnering could have been a better entry strategy. However, Quibi reportedly turned down pitches from social media influencers. “If it can be on YouTube, it can’t be on Quibi” this founder’s phrase became a baseline for the company’s decision-making. That dragged the company into retrofit of traditional TV shows chopped down in smaller pieces. A concept that was totally unfit for the millennial generation of customers who were used to enjoy free content they could relate to.
Third, the company ignored a major market shift: covid-19 pandemic. For example, one potential target segment was daily commuters. Obviously, with covid restrictions, that market shrank and became highly uncertain. However, the decision was taken to launch the company in April 2020 and to push through. Was it a bet on mass vaccination? We do not know. But clearly market risks were not factored in enough in the company launch plan.
Forth, it scaled too fast and burned cash unwisely. The company was spending $6M per hour in produced content. But the public was not convinced. So the marketing spending skyrocketed. Unwise decision to disregard social media marketing in favor of expensive ads at the Super Bowl and the Oscars did not pan out. Instead of forecasted 7 million subscribers in the 1st year, only 500 thousand people subscribed to the service within the first 6 months. That translated into insane customer acquisition costs. Rushing to hire 250 employees and add expensive overheads before reaching a crucial mass of subscribers made the business model unsustainable.
Last but not least, founders’ mindset and leadership style were not fit for purpose. Despite impressive background and professional network connections, the founders themselves were not either passionate about streaming, or familiar with the market. That could have been solved by taking into account the input from the millennial management team. Unfortunately, a top-down management style was adapted instead.
After 5 months, the company started to pay attention to the market feedback. It added features to share its content on the social media, connected with a blogger network and included tools to cast video from mobiles to TV screens. But it was already too late. The investors lost their patience and demanded their money back. That was the end. Quibi went back to the idea stage and sold off its assets.
The lesson from the story is that value drivers should be respected even by Hollywood celebrities. You need to set aside some time to reflect and to make informed decisions. Of course, there are many of fires to be put off and it’s very easy to get distracted. But being in a survival mode is not sustainable either for you, or for your business. That is why many founders appreciate having a coach at this stage. It is useful to lean on someone who keeps a safe distance from daily business and helps you to stay focused.
Strategic decision. At the end of this stage, you will hopefully figure out what works for you and your business. Then the choice becomes: to scale or not to scale? Joking aside, some founders may not really want to grow beyond this point. They start having acceptable income and may want to preserve their existing lifestyle instead of gearing up for the next stage.
Stage III: Catch me if you can
Objective. This is the most exciting and dynamic stage of rapid growth. Objective is to take advantage of all suitable opportunities to make a step change in the business.
Founder mindset. A major shift is required at this stage. Rapid expansion makes it impossible for the founders to manage every aspect of the business, as they ‘ve done previously. Any attempts to do so will only pull the business backwards and impede the growth. Founders have to learn to delegate operational decisions and focus on strategic ones. They become company CEOs.
Tensions. As CEOs are surfing on the growth waves, they will have to balance between agility and control. On one hand, you want to quickly adapt to changing market conditions or customer requests. On the other hand, as your business becomes bigger, you have less and less control of the output. Growing the team, operating from several locations, relying on resellers and distributors become a part of the game. Even for solopreneurs, filling up their calendars will trigger the need to outsource some less critical activities or hire virtual assistants. Thus, it’s a good time to start putting in place systems and processes to help you manage the growth.
The second common tension is between short-term financial goals and a long-term founder vision. Bringing in investors and creating a Board of Director are common at this stage. It allows the company to draw from a much broader experience, gain credibility and have easier access to key resources. However, it could also dramatically increase the tension.
A CEO has to learn to manage the Board. It is naïve to believe that hitting sales targets and growing market share are enough for the CEO to earn Board’s trust. Instead, CEOs will need to nurture relations with each individual Board member. Majority of the Board decisions are prepared and often made in advance, outside the Boardroom. A CEO has to navigate carefully in between of personalities, professional backgrounds and individual objectives. For example, an industry veteran may need to be consulted in advance for a major hiring or product development decisions. A VC fund would be more concerned about decisions directly affecting company’s valuation.
Research shows that up to 50% of the founders are fired from the CEO role by the time a startup reaches its 3rd anniversary. So it is a very stressful period for the them, despite encouraging business results. Therefore, many turn to their executive team, as well as outside advisors to support their position vis-à-vis the Board.
Value drivers. At this stage, value is created by managing both growth and sustainability. Exponential growth without supporting infrastructure and resources will burst the company (ArgyleSocial, early KIND snacks, Wise Acre Frozen Treats). Lavish spending on executive salaries and vanity acquisitions can put off investors (Beepi, Quibi). Focusing on rapid customer acquisition without a sustainable business model will dry the cash out (Shyp, MoviePass, Quirky, Pets.com, RewardMe).
Based on the above, the following value drivers could help to manage your growth intentionally.
1. Growth strategy. When you are moving fast, it’s better to move in the right direction. Therefore, having a strategy session is highly advisable at this point. Your long-term business strategy should be built around your competitive advantage.
For example, if you have a unique market position by discovering a new promising niche, you can focus on maximizing it (market share gain, share of valet increase, new distribution channels, product R&D and IP protection). If you enter more mature industries with strong established players, you could consider partnerships and preferred supplier status.
Usually multiple strategic options are available at this stage. You can pursue several growth avenues before choosing the one that is the best fit for your business. The key is to set the success criteria from the start, so that you can maintain focus. One of the best criteria is sustainability of the business model.
2. Business sustainability. Growing businesses generate revenues. However, their costs rise as well: production, sales, marketing, overheard, and support are major ones. And often costs grow faster than to the revenues. So it is crucial to control them.
Monitoring of company activities could be done via key performance indicators (KPIs). The most common KPIs at this stage are: burn rate, profit margin, conversation rate, customer acquisition cost and customer lifetime value. Too many companies wait until the next stage to start monitoring and reporting. However, right systems at the critical processes could remove bottlenecks and speed up the growth, not hinder it.
Sometimes, own revenues are not enough to support business growth. In this case, a startup starts looking for external financing. If a company has not sufficiently proven itself to obtain loans, wealthy investors, investment banks, mutual funds and VC firms may be willing to take a risk, especially in high growth tech industries. However, only a tiny percentage of all startups receive VC funding after a long period of fundraising activity. Therefore, make sure you can sustain your business without it by carefully planning startup activities. Running out of cash is traditionally the number 1 reason for startup failures.
By contrast, if you do manage to get financing, use forecasting to raise enough. If you are doing the second fundraising round too fast, your ownership and ability to manage the company will be diluted. So if you do run out of cash, consider venture debt. It is suitable for investor-backed start-ups with fast growth and a high cash burn rate. Typically, the amount of venture debt is set between 20% and 35% of the last equity round, and the drawing period could be quite extensive. Of course, there are interests to be paid, but infinitely it is less expensive than selling more shares of a fast-growing company. Additionally, VCs bring a hidden cost of expecting fast return on their investment. That could strongly interfere with the founders’ decision-making process.
3. Customer focus. As brand awareness grows, quality and availability of products or services could become a real challenge. Even if marketing has helped you to attract the customers, you still need to deliver on your promise.
First, you should be able to produce enough to meet the customer demand. Production industrialization, as well as automation, planning and scheduling help a lot, as they optimize the resource use. This does not apply only to organizations. Even if you are in a consulting or coaching business, you can templatize, produce evergreen content, on-line courses, books, automated webinars and so on. That helps you to boost availability without proportional increase in production costs or strain on resources.
Second, do not sacrifice quality for speed. Loyal customers is the foundation for your business. Apart from ensuring quality of the products or services, invest in their after-sales support. Even the simplest quality assurance system and CRM software could greatly contribute to customer satisfaction. Also make sure it becomes one of the key indicators in measuring your team’s performance.
Many companies took off very fast only to face disappointed customers leaving as rapidly as they came. Do not become one of them.
4. Leadership and Culture. Leaders shape company’s culture. Willingly or unwillingly, they set an example of what is accepted, rewarded, or rejected within the company. Thus, founders’ personal values and leadership style have direct impact on startup priorities, decision-making criteria, and employees it attracts and retains.
There no good or bad cultures. There are cultures that are aligned with the startup industry, goals and product portfolio and those misaligned. Participative cultures encourage teamwork, communication and flexibility. Ideal for creative environments and building a loyal community, they underperform in terms of productivity and timely decision-making. High-performance cultures are risk-taking, result-oriented, and competitive. They create value in innovation and technology space but can inflict instability and stress on the employees, leading to high turnover. By contrast, top-down cultures provide more stability by being predictable. Clear decision-making is suitable for regulated industries, healthcare or security but could create toxic and dull environment that undermines motivation.
Founders must be self-aware in order to leverage their startup culture to its full potential and to overcome its inherent flaws.
Strategic decision. After the growth stage, the company will gradually move to the maturity. So founders have to decide whether they want to continue leading the company or to step aside. The latter does not necessarily mean selling the business. It could also be done by transferring the steering wheel to a new CEO and taking a Board seat. At the same time, valuations could be high at this stage, making founder’s exit an attractive option. All in all, the founders must be honest about their personal goals for the next 3-5 years and use them as a decision-making criteria.
Stage IV: It’s complicated
Objective. As business matures, its growth plateaus. Prolonged period of no growth usually leads to business decline. Thus, the goal of this stage is to reinvent itself in order to preserve profitability.
Founder mindset. Mature business allows the founder to enjoy relative stability. Cash influx from operations is constant. The company is well established, it gained experience and reputation in the market. It has access to talent and capital due to the lower perceived risk. It has a loyal customer base and satisfied employees. Costs decline thanks to economies of scale and efficiency gains.
It is tempting to try extending this stage for as long as possible. However, maturity will not last forever. Founders must not cling to the old ways of doing business and should allow business to innovate.
Tension. As you may have guessed already, the biggest tension is between capitalizing on the success and business reinvention. Once novel, industries start to consolidate causing stagnating sales, increased competition, eroding profit margins and difficulty to attract new customers. Growth stalls.
In order to prepare for the future, the company should cut the “fat” and start gradually steering in a new direction.
Value drivers. Let’s see what drivers could support company’s transformation at this stage.
1.Long-term strategy. You can’t play it by ear anymore. Robust strategic planning session and use of proven frameworks and tools is the must at this point.
Incremental changes, such as trying to capitalize on brand equity, may not bring the intended results. The most stanning example is a recent launch of CNN+ that spent $300 million and shut down after 30 days of operation. So instead of gambling, you’d be better off considering real market trends and risks, competition, regulations such as data privacy, changes in customer preferences and adapting your business accordingly. Very likely this will trigger changes in operating model to allow for more flexibility moving forward. Your options could include vertical integration, franchising, portfolio optimization, geographic expansion and so on. Think big, start with the end goal in mind, and create a solid strategy to get there.
2. Technology. Most likely, technology has evolved since you’ve started the business. Embracing this shift through update of legacy systems and platforms, digitalization and automation of business processes can foster transformation. Use of AI and cloud infrastructure could help you to optimize and scale operations.
You can also leverage data and technology for other use cases. Knowledge management and sharing is one of the most obvious ones. Another one is using high quality diverse data and analytics to provide insights for better decision-making.
3. Cost control. At this stage, management accounting provides valuable insights for improving business efficiencies. For example, activity-based costing could help evaluating real profitability of products by taking into account overheard and indirect costs. Its results could be used, for example, for decisions to streamline product portfolio. It is also instrumental in re-structuring and business turn-around helping to identify individual asset potential. Needless to say, unprofitable products, services and activities should be eliminated.
4. Innovation. When product reaches market saturation stage, its competitors will drive prices down thanks to low costs. We start seeing frequent product promotions in order to bite into competition market share. Evolutionary product extensions, capitalizing on positive customer perception of the core brands, are also viable (Apple, Nike, Samsung). However, “milking the cows” is just one side of the coin. You need to nurture rising “stars” in your portfolio or take a bet on re-positioning for a new segment. Lacoste was once perceived as affluent retirees’ brand but managed to rejuvenate its customer base and re-discover profitability.
At the same time, innovation is not limited to the product portfolio. You can innovate by adapting new marketing strategies, diversifying distribution, developing new ways to support your customers or acquiring new assets or businesses. The bottom line is to remain customer-centric and to adapt to the changes in customer tastes and expectations.
5. Ecosystem. Mature companies operate within large interconnected systems of internal teams, customers, suppliers, distributors, and partners. Those multidisciplinary stakeholders could become a source of transformational value for the company by bringing complementary skills and capabilities.
Professional management often takes reigns of many company activities, adding their expertise to its assets. Strong and aligned leadership team is invaluable at this stage.
Reinventing the company is complex but could lay foundation for multiple years of continuing business success. Let’s take an example of IBM that once was a leading manufacturer of computer hardware. In early 1993, facing steep competition, the leadership decided to abandon the traditional business and to re-focus on software, IT consulting services and computer research, including strategic partnerships. As technology developed, in 2020 IBM decided to pivot again and to split into two companies: one dedicated to cloud computing and AI, another – to managed IT services. This is a strong example of leveraging core capabilities and riding on the market trends to reinvent itself. Another, more recent and controversial example is the Metaverse. Whether we support its philosophy or not, this business reinvention experiment will be fascinating to watch.
Strategic decision. Majority of the founders are faced with a dilemma of staying involved in the business or exiting. A lot depends on the trajectory the company is taking. Additionally, founders’ decisions are influenced by multiple stakeholders as well as external market forces. Hence, founders should align their personal goals with the best available business alternatives.
Growth stage V: Father of the bride
Objective. This is a stage of founder exit. It could happen at any stage of business growth and be voluntary or involuntary. But for the sake of the story, let’s imagine the founder stayed with the business through all stages and is planning to exit now. In this case, the goal would be to maximize company value during the transition period.
Founder mindset. As in the famous movie, founders should come in grips with the fact that their “baby” will have a life without them. Letting it go is hard. Even very successful exits are experienced by founders as psychological loss, at least partially. Allow yourself sufficient time to grieve and heal.
Tensions. Transition to the new cycle under a different ownership creates ethical challenges and requires reconciling interests of mutliple stakeholders. Long serving employees deserve recognition and reward for their contribution to the company’s success. Creditors, suppliers, customers and investors who supported the company throughout the years also merit a fair treatment. On the other hand, the margin between stagnating revenues and operational expenses could be shrinking. That puts pressure on the free cash flow that risks to affect company’s valuation.
Hence, founder decision to exit should be made well in advance, at least 18-24 months prior, in order to have a sufficient runway to manage those tensions successfully.
Value drivers. Key focus at this stage should be in preserving business for the future cycle.
1.Exit strategy. Opportunistic and otherwise unprepared exit could destroy the value that company built over years. Therefore, founders need to develop exit strategies based on the alignment of business and personal goals.
For small companies and family businesses, it is often a friend, a family member or an employee who wants to take over. Sometimes outside buyers could also be interested in benefiting from company’s loyal customer base, strategic location or high-quality products. Whatever is the case, a simple valuation based on asset value or sales is generally enough. Hence hiring a lawyer and an account is sufficient to deal with the deal terms and conditions, tax implications, contract negotiations and closure.
As for the bigger companies, founders exit strategy depends on the combination of their own goals and business potential.
For founders who strive to continue being involved in the business, an IPO could be the first step in the exit strategy. Previously, IPOs were often done at the earlier stages, but Google and Facebook set the precedent of going public 6 or even 8 years after the launch. At this time, company value is perceived high and risk low that makes floating company shares very attractive, unless founder ownership has been severely diluted. Additionally, company stakeholders, such as investors, customers and employees may want liquidity and transparency of company financials. The downside of IPO is increased costs due to heavy reporting and slower decisions because of more formal governance. Moreover, continuous efforts will be required to manage stock fluctuations and investor confidence while avoiding to become an M&A target. So it is a long game.
The alternative is selling the business the to a competitor, partner or a private equity fund. Private equity exit path is often the opposite to the IPO, as the former start by de-listing the company. But it could be an attractive option if business is sizeable, albeit deteriorating profitability. Private equity investors often aim at the targets of $100M valuation or higher, pooling multiple parties to finance the acquisition of 100% of company shares. Their goal is to streamline operations, cut costs and re-sell the company at a profit. Obviously, there is no real place for the founder in this scenario.
2. Succession planning. Whatever is the exit strategy, its execution plan should focus on business continuity through careful planning and forecasting. Apart from systems and processes, special attention should be paid to the succession planning. Founder departure could erode the quality of leadership. Subsequent leaders may be more attracted by renumeration packages than the company’s mission. Both the founder and the Board need to be very intentional in their criteria and choice of successors.
3. Stakeholder management. It is crucial to maintain stakeholders’ confidence in business viability during the transition period and beyond. Job security for existing employees, clear and timely communication with the customers, suppliers, partners and investors, as well as coherent execution of the transition plan are key to reduce uncertainty for the entire ecosystem.
But what if there is no happy ending? You business may enter a deadly downfall spiral, due to different reasons: not embracing change at maturity stage, lagging behind in technology, major market shift affecting customer demand, new competitive entry, product becoming obsolete, running out of financing and so on. In this case, a founder needs the courage to liquidate and close the business without further delay. The circumstances of founder’s exit could be even more disastrous, such as them losing their business due to sneaky contract clauses, hostile take-overs, or co-founder conflicts etc. But even the worst exit scenarios teach us a valuable lesson. Now it’s time to turn the page and move on.
Strategic decision. Following the exit, the most important decision becomes: what to do next? Some founders find new passions or start new companies. Other retire from business and simply enjoy life. Few could go back to the corporate world. Whatever is the case, your journey was certainly more breathtaking than any Hollywood movie.
Get in touch if you need advice navigating through different stages of business growth.