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Whenever I’m asked about the exit strategy for our company, my response is always “our goal is to build the best possible company, and if an offer comes along that we can’t refuse, we’ll take a look.” The general idea is that it’s best to build a sustainable, high-growth company that makes great, long-term decisions. Pushback I’ve gotten over the years from this strategy is often along the lines of “that’s great, but how do your employees that have equity get to cash out if you have no plans to sell the business.” My response is that our employees are compensated at market-rate salaries and the equity component should be seen as upside that might or might not happen.

There’s another group of entrepreneurs that have an exit strategy — e.g. when we get an offer for $25 million, we’re selling — and, of course, there’s no right or wrong. With a defined exit strategy, or at least a target exit range, it’s important to get all the founders and investors on the same page. If an offer does come along to buy the business, and the leaders aren’t aligned, it can lead to serious internal challenges (things get emotional quickly).

Entrepreneurs would do well to think about their personal approach to the exit strategy question, and if they have a target acquisition price in mind, share it with their inner circle.

What else? What are some more thoughts on a defined exit strategy vs the built to last answer?

Recently I was talking with an entrepreneur that has a small, fast-growing startup. Things are going well and he’s debating raising a Series A. There’s a good bit of interest from venture investors but there’s one hold up: he doesn’t want to take the opportunity of a $25 million (or smaller) exit off the table. For most venture funds, if the desired exit is less than a multiple of the fund amount, it isn’t worth it (e.g. a $100 million fund needs much bigger exits to move the needle).

Here’s what a $25 million exit might look like:

• Entrepreneurs – 70%
  • $17.5 million
  • 3 co-founders
    • $5.775 million each
• Employees – 15%
  • $3.75 million
• Investors – 15%
  • $3.75 million

For the founders, potentially having the opportunity to put away $4 million after taxes (if everything goes extremely well) would be life-changing money. Based on the entrepreneur’s goals, my advice was to figure out how to grow the business as fast as possible while minimizing dilution and keeping the option open for an exit that’s still meaningful to them (this might mean raising more angel money or trying to find a debt option). Not all entrepreneurs are trying to build billion dollar companies and it’s important to figure that out before going the venture capital route.

What else? What are some more thoughts on founder value in a $25 million exit?

Recently I was talking with an entrepreneurially twentysomething. He really wants to be an entrepreneur but a) doesn’t have enough money saved and b) doesn’t have a co-founder. At this point, it’s important to tease out if he wants to be an entrepreneur because startups are cool right now or if he really wants to be an entrepreneur because it’s who he is regardless of the timing.

Per the two things holding him back, he could easily be an entrepreneur by day and vallet by night to solve the money issue. As for the lack of a co-founder, it’s 100x easier to recruit a co-founder once the business is actually started and a prototype is in place (many people have a hard time visualizing things and are more easily convinced once they can see something). So, why isn’t he an entrepreneur now? I believe it has to do with being risk averse.

My favorite definition of risk comes from a recent Tim Ferriss post titled How to Say “No” When It Matters Most:

Risk – The likelihood of an irreversible negative outcome.

When people tell me I must love risk because I’m an entrepreneur I always respond that it feels less risky to me to be an entrepreneur. Why? I have a strong locus of control and want to own my destiny. As an entrepreneur, I’m ultimately responsible if we win or lose. That’s how I like it.

The next time someone says “that’s so risky”, ask them if there’s an irreversible component to the potential negative outcome. If the outcome is reversible, and has a reasonable chance of success, it’s likely less risky than perceived. If fact, most decisions and the resulting outcomes are reversible.

What else? What are some more thoughts on entrepreneurs and risk?

Whenever I’m talking to entrepreneurs for the first-time I like to figure out their why (see Start With Why). Why do they do this? Why be an entrepreneur? After understanding the why, I like to talk through the one page strategic plan that was required before meeting. Only, 9 out of 10 times the annual and quarterly goals are too generic. Goals like “raise money” or “sign new customers” are vague. I’m a fan of SMART goals.

Here’s Wikipedia’s definition of SMART goals from the origination of the acronym in 1981:

• Specific – target a specific area for improvement.
• Measurable – quantify or at least suggest an indicator of progress.
• Assignable – specify who will do it.
• Realistic – state what results can realistically be achieved, given available resources.
• Time-related – specify when the result(s) can be achieved.

Another variation has “Achievable” for the “A” and “Relevant” for the “R” in the acronym. Regardless, SMART goals are the way to go and plain goals should be avoided.

What else? What are some more thoughts on SMART goals?

Doug Leone is one of the top venture capitalists and helps run Sequoia Capital, the most prominent venture firm in the world. In this video of the week, Doug talks about why Sequoia looks to invest in immigrant entrepreneurs, how he got his start in the venture world, and what he sees on the horizon for the industry. Enjoy!

From YouTube: “Always take risks. If something is working like a dream, break it. Taking risks is the only way to keep on going,” shared Sequoia Capital Managing Partner Doug Leone during his Stanford GSB View From The Top talk on November 4. He also discussed the venture capital industry, what his team looks for in entrepreneurs, and more.

The New Yorker has a great article up on Reid Hoffman titled The Network Man. Reid founded LinkedIn and is a huge believer in networks and the power of relationships. In the article, the author plays back a power meal between Reid and Mark Pincus, founder of Zynga.

Here’s how the power meal works (in this case it was dinner):

• One-on-one meal
• Each person writes down a list of topics to discuss (the bigger the ideas, the better)
• Topics are prioritized in order or importance
• Each person shares their topics with the other person to find what the other person is most interested in
• One person starts and goes through their topics and then the other person goes through their topics

While not dissimilar from an agenda at a team meeting, writing down topics to discuss, and prioritizing them with the other person, makes for a much more impactful meal. Read The Network Man and try out the Reid Hoffman approach at your next power meal.

What else? What are some more thoughts on the idea of adding more structure to one-on-one business meals?

Recently I was talking to an entrepreneur that was in the process of selling his company. Now, this wasn’t a Software-as-a-Service company, but rather a services business with an expected valuation of 4-6x EBITDA (basically, profits). We got to debating the pros and cons of selling the business and I brought up the fact that selling the company, and the resulting passive income, would be much less than the profits now. Here’s how the math works out:

• Assume the business is doing $5 million in revenue and makes $1 million per year in profits (20% margins)
• Assume a valuation of 6x profits, so the business would be valued at $6 million (6x is high for a services business)
• Assume a tax rate of 25% (varies by state) on the long term capital gains from the sale for an after-tax take home of $4 million
• Income/rate of return scenarios:
  • 5% of $4 million = $200,000
  • 10% of $4 million = $400,000

So, after selling a services business making $1 million per year in profits, the owner would make $400,000 per year in income (if able to earn 10% per year on the money, which is high). Of course, the entrepreneur would have more free time, flexibility, etc. but he’d actually take home much less money. Most businesses are bought for a multiple of profits and the resulting income to the owners is significantly less than what they made before.

What else? What are some more thoughts on the idea that selling a company results in less annual income to the entrepreneur?

Two weeks ago marked the three year anniversary of the Pardot exit (see ExactTarget and Pardot Join Forces). Naturally, it’s amazing how fast the time goes by. Of course, after any major life event there are a number of takeaways. Here are a few of those from the past three years:

• Marketing automation, as a market, has proved even bigger and more important than we even thought. I remember pitching VCs back in 2009 how marketing automation was this great market, and had a hard time getting buy-in. Well, now, six years later, it’s a strong medium-sized market and still growing fast.
• Software-as-a-Service (SaaS), while good back then, is great now. Investors love SaaS, and fast-growing businesses, making a rocketship like Pardot incredibly valuable. While it’s easy to second guess what could have been, selling at a local maximum was the right call.
• The journey is much more fun that the destination. Selling the company was truly a life-changing event, but working with great people and building a great company was the real reward. I still marvel at all the talented people we had on the team and what we were able to accomplish. Unreal.
• Second acts are really hard to pull off and I’m glad that the Atlanta Tech Village turned out to be something much greater than a labor of love. Bringing together a passionate community and helping so many entrepreneurs has been incredibly rewarding. Now, I just need to figure out my third act…
• Seeing Pardot grow and thrive as part of the Salesforce.com family has been great. Knowing that it’s more than quadrupled in number of employees and many times that in customers makes me proud that we built something that was scalable and strong. I have no doubt that Pardot will eventually be the world’s most widely used B2B marketing automation system.

Pardot was an amazing experience and I’m thankful to have been a part of the team. Three years later the business continues to do great and shows no signs of slowing down. I’ve learned a good bit over these past three years and look forward to learning even more.

What else? What are some more takeaways three years after the Pardot exit?