"Exit Strategy" = "All eyes on selling out"

Think about that. The very notion of orthodox exit strategy is to sell out.

How can you expect a business to continually thrive with innovation when you're involvement is to get everyone on board for the exit - to get rid of it?

Guess that means Venture funds need to be pickier on who their limited partners are and be totally wedded to the long term strategy of a company. For it to work Entrepreneurs need to focus on delivering something of value and not on cashing out, VCs need to focus on providing capital for growth that might mature in 10 years rather than cashing out in 3-5 years and LPs need to focus on long term growth and larger returns in the long run. In the words of the London underground "all change".

Great post.

This a deep call for courage. At tough one for the entrepreneur + board.

question to umair: does linkedin or facebook fit the description of companies that haven't yet sold out?

I think that one of the problems of how venture capital works today is the obsession with exits. New ventures don't have to profitable from the get-go - that model does not require VC money - but they have to have a clear path to sustainable profitability. A cool innovation that cannot find a way to pay its bills does not deserve to survive - actually, it does not deserve to see the light of day beyond experimentation.

Creating companies that are profitable and innovative at the same time is the best way to open up the field to new investors, new buyers, new paths to liquidity through secondary markets. It's the best way to give investors and entrepreneurs alike the peace of mind necessary to put the true, durable, meaningful conviction that you call for.

Thx Umair. Purpose. On purpose.
Another good reminder of the truth in the four absolutes.
Keep on.

managing for the next quarter instead of the next generation, that's what my bonuses are all about!

go beyond greed and self interest? you really are a radical, no way.

cashing out, that is what it is all about. that's value.

sustainablity? social value? that's for suckers.

jokes aside, how do you transform character?

Character can be transformed by rewarding value creation, and punishing exploitation and bastardisation with penalties/exhile.

DNA continues to rot because we allow it to. We continue to work within a system where greed and self interest are economically (and morally) rationalised. It destroys any chance of long term sustainable value creation.

Startups will begin to pop up with similar DNA to Google. They will work with each other under the banner of value creation, to the exclusion of other exploitative corpocracies. This will be the new market from which new firms will grow and flourish, under the principles of speed, community, openness and Love.

This shouldn't be a conversation about "selling out". GSTrUE and OPUS-5 can help mid-stage companies go the distance without the hassle of going public. That could be huge.

When a mid-stage company with real revenue and a short path to profitably wants access to capital for growth it has limited options; VC, Strategics, Debt, and later-stage investors.

VC may not be the best route if the future return doesn't fit their 5-10x model and you have to take a terrible liquidation preference in return.

Strategic investment may require giving away important strategic information that limits your edge should the strategic investor be in direct competition with you.

Debt is dangerous, especially now.

Later-Stage investors are more attractive than the other three, but they want an exit event eventually and right now it's either selling the company to a bigger concern, or taking the company public. The company may not want to do either.

These new private markets could benefit the mid-stage company by providing liquidity to early and later-stage investors AND provide further access to capital at the same time - and without the hassle of going public.

That is far from selling out - it's having the right access to capital to make it happen.

Great post Umair. I've recently been seeking out investors for a new business of mine that would turn a particular media market on its head and completely revolutionize how that media is developed, created and consumed. Thus far there's not a single other new media player in that market.

My biggest hurdle that's so far prevented anyone from investing? I can't answer the question: "What's the exit strategy?"

Its insane. Here's a solid business concept, which they agree has a lot of potential. But they aren't interested in investing because they don't see a clear way to sell out in 5 years.

The state of VC reminds me of how the stock market seems to destroy good companies these days. When a company goes public, there's a constant drive to maintain a continuous uphill climb in stock price; regardless of whether your actions are evil or not.

"Gotta get that stock price up... outsource our manufacturing to slave labor in third world countries ........ I don't care that 8 year olds are losing their fingers in those factories! I got stockholders breathing down my neck!"

Umair, you suggested democratization of venture funding. That certainly sounds interesting, but would there not also be a huge risk that would in fact increase the temptation to be evil? in much the same way that going public does? You have a larger base of investors, the majority of whom won't be as intimately familiar with the companies their investing in as a single VC would? It would seem their temptation to focus solely on profits could eventually be even worse than some of the VC's out there.

Thanks for saying this for the rest of us who can't. :)

The parallels b/w this thesis and the music business are striking:

- institutions have no appetite for investing in the NEW
- NEW is what creates value
- the time horizon necessary to really hit it out of the park is beyond comprehension for all but the most driven, financially secure, and spiritually centered

I wonder if the strategy of VC's letting entrepreneurs get liquidity out of their sweat equity is helping push time horizons into the future.

So ya, Fred, when are you gonna let all us peons invest in USV?

OR BETTER YET:

Hey Umair, when are you gonna let all us peons INVEST IN HAVAS MEDIA LAB?

;-)

"How about democratization? Why can't you invest in a venture fund if you want to? Direct investment would go a long way towards curing risk aversion - fast."

From what I understand, through a Gompers & Lerner article, I think, the problem with the democratisation of this space is the risky nature of such investments and the lack of information a casual investor has about that risk. Back in the days of ADR, I think, one of the first VC-funds, they actually collected money through open scandals. It was only after problems started occurring, people lost their savings, that limited funds were elected that worked with institutional investors instead, thus solving part of that problem.

And I don't think it's necessarily a question of democratisation either, rather it's about lifespan. If a company needs 10 years to evolve into a blooming enterprise, while funds are limited to 5 or 7 years, then there is a problem, which is most often solved by a premature sale or other type of exit.

Is it feasible to have a publicly owned venture fund? Perhaps one with smaller stakes in more companies to avoid some of the regulatory hurdles of owning controlling stakes...seeing a public value on 10%-15% of your company could give early-stage folks a little more confidence in what they're building, and not feel obliged to accept the first, apparently generou$, buyout offer that comes their way.

Could be fun. Who'll put it together?

Interesting thread in many ways. A similar transformation is being called for in the foundation world.

A key contributor to the DNA of investment funds is the DNA of their investors. Given that, it's hardly surprising to find the old DNA staunchly embodied in funds and foundations as their investors have often become financially successful from models based on the 'old' strategy and DNA. Old dogs.

The Web 2.0/social media field which requires the new edge competencies to be most successful is, I think, proving an interesting frontier in the evolution of how to effectively invest in this new context. The recognized advantage on focusing on the core elements of the concept while allowing time for the ultimate opportunities to emerge. Twitter is one of the most interesting 'experiments' in this.

In one sense the 'social' mission/venture sector should be a space ventures and venturers were more comfortable focusing on purpose and DNA given that their stated aims are often non-financial goals with very long horizons. And while there are actually some interesting social venture funds that have unintentionally been working through some of these things there is actually a disturbing trend to pick up the old venture fund strategies to apply in the social sector - and that's clearly a shift in the wrong direction.

The more attention we place on exploring, understanding, and describing what 'open' venture investing looks like, the more we will do to catalyze game-changing solutions to the impending macropalypse. Wouldn't that be cool? :-) Giddy-up!

"That path is simple: true, durable radical innovation, backed up by something today's venture industry is missing in spades: a deeply felt sense of purpose; the courage, hunger, and commitment to stay the course."

I'd add another simple element to the equation: profitability. Venture investors' - and therefore entrepreneurs' - primary focus is the exit. They should put instead good old cash flow generation ahead of that. Once a company is able to sustain itself it is a lot easier to find purpose and commitment; new investors and buyers come to the table; secondary private markets become accessible.

For radical innovation to be durable, it has to be profitable - or at least has to have a clear path to profitability. That's what gave Google the ability to resist tempting offers and continue innovating. Innovation for the sake of innovation does not belong to the startup world.

How about computing is still a fairly young science?
We cannot expect several Googles at this stage. It is still early. Software as a science still has some maturing to do. Let's give it some time. When we are halfway through, we will see companies that will make Google's Innovation feel as a drop of water into he Ocean.

A very insightful post as usual. I would make the obvious point, though, that Google did apparently offer to sell to Yahoo:-

"Google's founders said they wanted $1bn (£500m) for the company. Semel offered it and they raised the price to $3bn. Semel walked away."

Source : http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/03/ccyahoo103.xml

Umair

Venture also is the most skewed of all asset classes, talk about a powerlaw. 95% of returns are attributable to 46 firms (see Steve Bird of Focus Ventures) and in many cases to a small number of partners within those firms.

The secrecy of the returns occludes the reality--that with the exception of a few proven winners who can deliver alpha--venture is predominantly a beta hunt.

So perhaps one reason why there aren't more Googles is because there are very few entrepreneurs who can create a Google, very few venture capitalists who can spot and support them, and few moments in time which will allow it.

If we are dependent on the syzygy of these unlikely events, it is a wonder we even have one Google.

Umair; this is getting a little insular don't you think? I love Fred too and can appreciate writing for him and his friends but every entrepreneur knows the whole point to vcs is to reduce (of if they could have their way) even eliminate risk. There is nothing new here. You think when they solicit funds they talk about "doing good." I highly doubt it. They're pitching folks that have already made coin and are worrying about losing it.

Lets look at the real customer of a VC. Is it the entrepreneur? I doubt it. So the equation is inherently loaded at the git go.

Please turn your keen mind to more important industries that need disruption. To my mind the most immediate would be something like food. Could you imagine the impact of say an Etsy for direct sale of food stuffs and other organic products. Riff on that my friend.

Actually, Larry and Sergey almost sold out early to Excite.com, but wanted a few hundred thousand more than what was offered. I read that it was $1.3 million versus about $900,000, but John Battelle's book says that it was $1.6 million versus $750,000. Imagine if Excite.com bought Google back then? A incredible company would be dead now.

Greed versus Purpose, The Concept of a common wealth widely held laid the foundation for the Elizabethan expansion as well as the Victorian expansion in Britain. Capital markets were tempered by the widely held belief in investment in the future for the benefit of all. Mill owners built terraced houses for mill workers to rent and living standards improved. The wealth generated enabled massive infrastructure investments. The sort term pursuit of profit is ultimately destructive to capital. If greed is not tempered by sober judgement we all suffer as our economy fails to reinvest in itself.

Nice post. However, I am not sure about Google not selling out early on because they had a greater purpose. I am more inclined to agree with Paul Graham who has an interesting take on this:
http://www.paulgraham.com/googles.html

Rajesh

A truly outstanding article getting to the essence of things.
Many Thanks, Umair! Regards, Keith Johnson, Author "365 Great Affirmations"

Great discussion point -- more and more I realize that there is a fundamental difference between what VCs and entrepreneurs are trying to achieve. This conflict of purpose is
(1) a source of new venture failure
(2) a reason for new ventures selling out early
(3) a reason that entrepreneurs are being kicked out of their own companies
(4) a driver of replication strategies in the sectors of the economy that should be looking to do things differently.
The very thing that fostered the establishment of a high growth entrepreneurial economy in the US could be the thing that kills it -- VCs. VC practices are becoming too institutionalized
and the club too elitist.

VC’s are supposed to make money on their investment.

Revolutions are about the purpose, and secondly about the money. They are about the money only to sustain the purpose, and achieve the revolution.

You have a disconnect at ‘hello’. Google was serendipitous, not by master plan.