Businesses are supposed to make money

I read with some interest the response of Divesh Sisodraker to the Vancouver Angel Forum’s Exit Strategy session written up in Techvibes. The core issue of “positioning for an exit” is a particularly contentious one for founders and VCs alike. Behind closed doors, it has become an oft-ridiculed cliche among Entrepreneurs when VCs wax poetic about getting bought by Google or introducing a company to so-and-so, VP of whatever at Yahoo whom they once met at a cocktail party. Usually they say this before you get your money. After that, it’s all up to you pal.

Commonly when I pitch VCs there is discussion of an exit strategy fairly early on. This serves a useful purpose in benchmarking startups against the elephants and to some extend their competitors, I guess. VCs look for a whale in the vertical your startup wants to operate in. I was recently shopping a deal (since shelved) in which there was no whale, and which had profitability within a year and steadily growing margins beyond that as its exit strategy. For most VCs this is #FAIL.

But having been part of the team at a startup which had lots of prospects of an exit by acquisition (and plenty of tire-kickers) during the technology boom of the 1990s but which ultimately didn’t exit in a traditional sense, I can only tell you that from my personal experience vectoring your whole strategy toward getting acquired by some elephant is a fool’s errand. Much time was spent building demos for whales and pitching and re-pitching them (as staffing and strategies shifted) and zipping all over the globe telling our story behind closed doors when we could have been building cool stuff for customers and growing the business.

When the smoke cleared in Silicon Valley in 2001 and it was evident that the whales were woundedly swimming out to sea, we iterated an already-profitable business into a much more interesting vertical using the same technology, but our VCs (who wanted to shutter the company and move on) chose not to come along for the ride. Now, that new business has secured top-tier VC and has a handful of the largest communications & technology companies in the world as channel partners — and is making money. Lots of it. Sorry guys, should have accepted the need for change.

VCs (particularly Canadian VCs) aren’t really that interested in building healthy businesses, if we’re going to be honest here. They typically want to get in and out with a 5x-10x multiple within 4 years. As the exit event horizon gets longer they will squeeze founders down to single-digit percentage points, replace entrepreneurs with “rainmakers” (who are really just burned out greyhairs), and become obstructionist board members. This is a path followed by numerous contemporary Vancouver firms backed by Canadian VC dollars. It’s a strategy that benefits neither founders (unless they just value having a job, which there are far less stressful ways to accomplish) nor the tech community nor the investors nor the public (who likely supported these startups via SR&ED etc). The result is rarely a 2x-5x multiple, at the end of that game, which is why the Canadian Venture Capital market is in a giant amount of pain at the moment.

Seasoned American VCs tend to assume a posture within a business structure until they’re compelled to make changes. In a successful scenario, the BoD functions to evaluate threats and shifting trends to adjust or radically alter the strategy. I have not yet found it (okay, I gave up looking) but I am sure there is a lever somewhere within the big Canadian VCs that allows them to accept the failure of one business model and to adapt and embrace the opportunity within another without leaving a pile of dead bodies smouldering in the board room.

Particularly when a company is 4-5 years into its plan (which means 1-2 years beyond its original plan) it is necessary and healthy to evaluate change and open onesself to exits of a different kind or within different sectors. I see that as exceptional behaviour in Canada, rather than the rule.

Elephants are fickle dance partners. Typically, unless you have a quality, personal relationship or longstanding “business friendship” with a powerful advocate within that company; or unless you blow people away with your general excellence and exuberance — your vision of getting absorbed into the Chocolate Factory in Mountain View just ain’t gonna happen. I have a strong admiration for professional deal builders like Ted Leonsis and Mark Cuban but I realized a long time ago in my career that I can’t sell air. Most of you — this evaluation is based solely on statistical data, and is not a personal assessment — can’t do it, either.

The thing about beauty pageants is that there is only really ever one winner. The ONLY thing that gets you further down the road and allows you to make that change (apart from common sense) is revenue. Hopefully, being operationally profitable is enough to reinvest in strategy and take a good hard look at direction more and more often as you bump down the highway. Unless you are a) independently wealthy, b) able to secure capital easily from drooling investors, and c) clubbing the marketplace senseless with your audacious idea like Evan Williams, why on earth should you orient your business around anything else?

Businesses are supposed to make money.

You could have skipped this whole article and just read the headline, I guess.

Ian Andrew Bell is a Techvibes Guest Contributor.