Although many don’t like this phrase, it’s one to consider:
“Begin with the end in mind.”
What this means in the world of business is: “What is your exit plan?” “What are you seeking to get out of this business when it’s all said and done?”
Think of the rainbow as your business journey from startup on forward and the pot of gold as your financial goal at the end– your exit.
In simpler terms, there are 3 categories of exits one can typically expect if their startup is successful:
1) New car exit ($ -> thousands to tens of thousands)
2) New house exit ($$ -> hundreds of thousands)
3) New life exit ($$$ -> millions!!!) – THE MOST DESIRED OUTCOME!
Most startups that are acquired in the early stages fall into category 1 or 2. In reality, the more money you raise from investors without significant traction (in terms of revenues, not vanity metrics), the more likely you are to be in category 1 or lower. Yes, there is a lower category. Typically, if you land in that category it means that you’ve sold the company for enough (many times barely enough) to pay back the debts accrued on behalf of the company and nothing more. David Cummings, a prominent Atlanta investor and tech startup success as the co-founder of Pardot (bootstrapped and sold for almost $100MM after 5 years of operating!), wrote a blog post on this topic, listing 3 reasons why founders don’t make money after raising venture capital. It’s worth the read.
Then Reality Smacks You in the Face…
Here’s the misconception: An article circulating online reports that Startup XYZ has raised $10MM. Upon reading this, most people believe that the founders have instantly become rich, multi-millionaires.
Here’s the truth: The money raised is meant to go back into the company, not into the pockets of the founding team. Sure, they’ll typically be able to start paying themselves a modest salary once funded, however, the rest is meant for growing the company to a point of acceptable ROI for the risk-taking investors. The payday for the founders is supposed to come at the time of exit, along with their investors.
Unfortunately, if you haven’t negotiated favorable terms for the funding you’ve received, chances are you’ll fall into one of the categories as described in David Cumming’s blog post. Again, if you are unfamiliar, it’s well worth the read. And if things pan out favorably for your startup, meaning growth accelerates and the market really responds well to what you’re offering, increasing the value of the company to the point where potential acquirers begin to take notice and consider placing a bid on your operation, at the conclusion of it all you’ll reach one of the 3 pots of gold defined at the beginning of this post.
If you’ve played your cards right, had good legal counsel and made smart decisions along the way, and MOST IMPORTANTLY partnered with investors who were fair and considerate enough to have terms assuring that you’ll get a fair slice of the pie upon exit, you’ll be quite satisfied with the contents of your pot at the end of the rainbow.
Here’s a final word: There’s no doubt that the pot of gold at the end is quite rewarding. But most importantly you’ll appreciate the entire journey of pursuit, persistence, resilience, learning, growing, and confirming your capabilities…yea, the significance and power of that rainbow shouldn’t be taken for granted. Enjoy the journey. It’s the REAL reward.
What has been the most rewarding parts of your journey so far? Which “pot” are you expecting at the end of your “rainbow”?