Venture Crapital

My last post led me to think about "exit plans". When we started easyDNS back in the late 90's, I thought "exit plans were for wimps". It made no sense. "Before you even get started, you're supposed to have an exit plan". It smacked of dotcom bubble thinking and that was something we were all hoping to avoid.

Over the years, the lack of an exit plan came back to haunt us. As it turns out, I think I now know when exit plans are necessary:

• When there is more than one shareholder
  
• When any kind of external investment occurs or is sought
  
• When you're actually executing against a business plan
  

We never did have a unified exit strategy and whenever opportunities, offers or traps presented themselves, the lack of a unified plan amongst the partners pretty well derailed "liquidation events" before they ever got rolling. I think that overall we came out ahead as a result and this lack of planning ended up saving us from what were probably company-ending blunders. We got lucky in that respect.

But when the time finally came for the partners to really evaluate our life paths with respect to the business, we probably would have been better served to have agreed on an exit strategy going in and revised it over the years as our circumstances changed.

Now that I'm the sole shareholder in the business, there is no exit strategy, and I don't foresee one in the future. I'm grateful to be where I am today and wouldn't want to live my life any other way. The business for me isn't a job, it's a lifestyle (that dreaded L-word VCs despise) and I'm not executing against a rigid plan that calls for targets, milestones and an eventual liquidation event.

While I don't exactly expect to my daughter to take over the business (she is after all, only four months old and may want to do something else with her life) I like to think I may likely still be running easyDNS in 20 years, even though we may not be in the DNS business anymore (by then who knows what things will look like, computers may use some sort of quantum foam to find each other).

When you're fortunate enough to be able to write your own ticket, you don't need an exit plan and I think if you dwell on one you run the risk of "building to sell" or trying for a "quick flip" and even hardcore veteran investors and VCs think that is an unsound approach.

When multiple stakeholders are involved, part of playing nice with others is coming to an agreement over a unified exit strategy. Again, while you don't want to get too distracted over it (arguing over whether "the buyout number" should be 20 million versus 50 million is pointless if you haven't earned a dime yet), it should probably be done sooner than later.

One way to get it done early, without wasting too much time over it, is to create some basic "shape of deal" criterea and a formula to serve as a simple screen going forward.

Example exit strategy formula: Any buyout has to be a share sale versus an asset sale, be all cash and be a minimum 2X revenues or 7X earnings.

If your business gets anywhere off the ground, offers of some shape or form will come. Most of them will be distracting snipe hunts and a waste of time. Without a basic screening formula you and your partners may waste precious time and energy arguing over it, but with the formula you can quickly evaluate it and if it comes up short simply dismiss it and get on with running the business.