Identify and describe the three entrepreneurial Exit Types? Provide real world examples
Entrepreneurial ventures have three main exit types: initial public offering (IPO), acquisition or to dissolve the company. An entrepreneurial firm usually cannot remain entrepreneurial forever as they are characterised by growth and intuitively it is not possible to grow forever. An Initial public offering is described as the most desired entrepreneurship strategy despite most world economies not even having a stock market (Davis, 2016). Albeit, the IPO can provide an entrepreneurial firm with critical resources for its future expansion (Burton, Chahine, Filatotchev, 2009). Furthermore, acquisition is desirable if there is a high valuation, where the venture is acquired for a large sum of money, specifically a high share price. The existing founders and shareholders are then in the position to sell their equity at the increased price or wait it out to see if the firm will grow even further. The decision to dissolve the company can be made when milestones are not being met and even pivoting strategies are not leading to success. The fundamental value proposition is in question and the decision is made to abandon the venture to limit future losses (Manigart, 2018).
The preferable exit strategy can differ depending on the motivations of the founder. For instance, founders who place maintaining control and leadership ahead of financial goals will prefer to keep their position as CEO rather than being acquired by other companies and forced to give away board and voting rights (Wasserman, 2008). Consequently, even in an IPO exit strategy, founders will put strict voting right conditions to ensure that they can maintain control of the firm. This may cause the stock to underperform but founders are willing to make this sacrifice as long as they can maintain their position as king. On the other hand, founders who have motivations to grow the company financially are more prepared to give up equity in early rounds and sacrifice voting rights to experienced investors. These founders are willing to give up their position as CEO in order to grow the company faster. They are okay with a smaller slice of the company with reasonable hope that it will be more valuable.
Founders must understand that as the firm grows, there is a dramatic broadening of skills required for the CEO, including the need to be able to structure the organisation, the need to create formal processes, communicate with finance executives and the creation of managerial hierarchy. Consequently, unless founders can demonstrate the ability to carry out these tasks it is likely that investors will suggest for them to surrender their position for the betterment of the company. Founders will be emotionally agitated by the suggestion and there will be friction as they believe that they have put their blood, sweat and tears in the firm and deserve to be in the driver’s seat making the decisions on where the firm should go. Founder’s are often given a cosmetic role to utilise their existing relationships and knowledge but sometimes this is not enough to entice founders to stay.
In my view, founders should not be naïve about such eventualities and make sure to educate themselves before making agreements with investors to avoid being exploited. They should consult legal advice before signing term-sheets and making any final decision on acquisition offers. Moreover, they should understand how board and voting rights will affect their decision making capabilities. It is well within the founder’s right to maintain ownership, control and their position as CEO if that is what they wish. However, founders cannot have their cake and eat it. Well, unless in the rare case they happen to be Jeff Bezos or Richard Branson. Moreover, unless founders are well equipped for the position of CEO with demonstrable management and leadership experience in large companies they may have to sacrifice fast growth to maintain their control, as investors will likely demand board and voting rights. Experienced investors often shape their investment decisions by founder motivations (Wassermann, 2008). There is nothing wrong with founders refusing investment offers that they are not comfortable with, but they will need to be prepared to bootstrap — use funding from family and friends, establish a working revenue model, launch a minimal viable product and stay lean. In fact, it is found that most companies bootstrap at some stage of their journey (Bartlett and Economy — 2002).