An early stage startup shouldn’t have an exit strategy

I was recently speaking with an entrepreneur who successfully raised a seed round, developed a fully functional product, and is currently looking for follow-on funding. His mastery of the problem which his team is solving, their customer segmentation, and their growth plan, was excellent. In addition to having a deep understanding of the technical details, he conveyed his vision for the company with enthusiasm and simplicity. I’m convinced that he’ll be able to raise the round he’s looking for and will have a decent shot at making the startup successful.

However there was one moment in our conversation that left me with a bitter sweet taste. Towards the end of our discussion, the entrepreneur said that there were several exit opportunities which he would be looking to pursue in the next 2 to 3 years. While a discussion of exit opportunities may be appropriate for a company that already has a stable recurring revenue stream, as in the case of a later stage startup or a private equity investment, I find such discussions misplaced for early stage startups. Unfortunately, such discussions have recently become all too common. Since startups are all the rage these days, many people who instrinsically don’t care about technology, innovation, or customer service are entering the industry with the goal of making a quick buck. Talking about exit strategies before scaling is a natural reflection of this trend.

An early stage startup is, by definition, young. When you’re young, you have a lot of room to grow. And the only way that you’re going to achieve your true growth potential is by having a laser focus on that growth. If you choose to focus on exit opportunities instead, you’ll lose on two fronts. First, you’ll sacrifice valuable time which you could be allocating towards building a product that offers your customers an ever improving experience. Second, you’ll miss the chance to build something truly revolutionary. Instead of building the best thing you can, you’ll build what you think will be bought. Imposing this constraint may make you more likely to achieve an average outcome, but it will come at the expense of pursuing a remarkable outcome.

Building for an exit also sends a strong signal about the motivation of the entrepreneur. An exit allows the entrepreneur to exchange their shares for cash. At this stage it’s useful to distinguish between complete and partial exits. A complete exit is one where an existing shareholder sells all of their ownership interest in a company. This is in contrast to a partial exit, where a shareholder sells a fraction of their shares. A partial exit can be valuable to reward an entrepreneur for years of hard work at subsistence-level salaries while ensuring that they retain sufficient equity ownership to continue investing all their energy into the startup’s growth.

However a discussion about exit strategies refers to complete, not partial exits. As a result such discussions suggest that the entrepreneur will no longer have any ownership in the startup after they exit. When such discussions take place in the context of an early stage startup, they serve as a strong indication that the entrepreneur’s primary motivation is that of financial gain. While this is a fair motivating factor, I do not want to invest in an entrepreneur that places it at the top of their goals. The best entrepreneurs are those whose primary motivation is non-financial. Instead, they seek to deliver a vision greater than themselves and have an unwavering belief that they are the best person to do so. When a resolute entrepreneur seeks to deliver a vision they believe in, the exit strategy takes care of itself.