Exit myth busters: why that startup big exit you're dreaming of probably won't happen
This has been an unsettling week for any founders and entrepreneurs working away for relatively nothing, fuelled by dreams of their big exit. A collective - and much hoped for - bubble was burst as news broke of how the founders (and early angel investors and employees) of Scotland's of big startup success story, Fanduel, walked away from their $465million exit without a penny.
The reaction on Facebook, Twitter, LinkedIn etc was one of general confusion, some sympathy and also a distinct note of anger (hopefully directed at the seeming unfairness of it all, rather than the founders who I believe deserve full support. You can’t judge when you don’t know the full facts and haven't lived through making these kinds of horrible choices and non-choices!).
People keep asking, how this can happen? What went wrong? What can be done? How did these evil investors get away with this treachery?
I have written before about Heidi Roizen's brilliant article on How To Build A Unicorn And Walk Away With Nothing, so I won't labour the detail, but she clearly demonstrates how every funding decision - many made with the founders' backs against a wall - come back into play at the end. And once the pie is carved up, there's nothing left for the first people in. The people that took the most risk and did the most work lose out when relatively normal business challenges mean their company doesn’t live up to their peak valuation, that valuation is actively suppressed or fails to bounce back after a setback, and they are forced into accepting a below optimum sale price by investors with secondary agendas and plenty of downside protection. If you haven’t read it, I urge you to check it out (once you’ve read the rest of this rant, obviously!)
Due to the lack of big exits in our startup ecosystem, the relative commonness of this scenario - and the down-side protections and preferences that VCs and later stage investors typically seek - is something not that many founders have fully lived through yet. The other big success in Scotland, Skyscanner, did not take external funding until relatively late in its life. They were self funding and revenue funding from the beginning - meaning the founders retained an usual degree of control (and with it their jobs) for far longer than usual.
For the sake of the health of our startups, scaleups and the founders behind them, the myth of the big exit looming just over the horizon needs to be permanently put to rest.
While the scale of the Fanduel story is unusual for Scotland (and perhaps the UK) the story of the lame, miserable, nervous-breakdown inducing, underwhelming, sad, zombie - or spectacularly horrible - exit is far more common than the billionaire making dream that so many entrepreneurs cling too.
Behind many an acquisition are derisory sums paid out, lock-in terms for teams, non-disclosure agreements, full on gagging agreements, regret, shame, embarrassment and collective collusion to make everyone involved look a bit less bad by not letting the details of “this particular mess” get out.
Yet I'm not really hearing anyone talk publicly about this. So founders and entrepreneurs go on writing their big exit in to their business plan and personal finances (anyone else not got a pension because this one will definitely work?) And those on the receiving end of a less than magical exit are mostly too embarrassed to admit they are flat broke.
And this is despite the fact that many of the founders I meet are not primarily motivated by money (just as well, as they rarely have any!) We’re mostly trying to solve a problem, create a solution, build something. It's the injustice of the big exit gone sour that really galls.
So maybe, just maybe, the Fanduel story can trigger a more honest conversation - especially within the Scottish startup ecosystem. But, given how these things are normally accompanied by punitive gagging orders and non-disclosure agreements on all those individuals directly involved, and there is no reason to assume these founders are any different, the conversation needs to be started by those outside this story, not inside it. Those who already have lived it, seen it, experienced it - but crucially are not in the eye of this current storm. And anyway, there is often more to be learned from general themes and archetypes, than from one uniquely specific story.
Fortunately as Entrepreneur Agony Aunt, I have heard enough horror stories to get us started. (Thank you every one of you over the last year or so who has trusted me with what for all of you is quite clearly one of the most painful experiences of your life. And it is interesting to observe that while time softens the raw extremes of emotions and focuses the conversation down to the killer points, the pain and sense of injustice remains as strong as ever).
Here’s a few highlights to keep you awake at night. Anonymous for obvious reasons, each has one or more real founder behind it, and that founder has told me at least part of their story directly. It includes:
Founders jettisoned from their business with no cash payout beyond basic salary, but not legally allowed to work for a year or more. And generally carefully diluted out of the share cap for good measure.
Founders and early employees all pushed out as bad leavers just before their vesting date, meaning they lost their shares/options, which then defaulted to the shareholders who pushed them out.
A founder left personally with all of the debt and none of the exit proceeds, because of the way they lent to the company and incorrectly structured their shares at the very beginning.
A co-founding team fired as bad-leavers for supporting an “insulting” 9 figure acquisition offer. They lost their shares, no other bid followed and the company was dead within the year. Everyone lost. (A recurring theme!)
Startups acquired by corporates, with those entrepreneurs ending up as locked in employees on well below market rates, while their product is shelved or left to die. This happens when corporates find an acqui-hire can be cheaper and faster than recruiting and building specialist teams directly, or in a Hooli style bid to block young potential competitors or market entrants.
Companies sold at the worst possible moment for a terrible price, solely to benefit the different interests of a particular controlling or influencing group.
Executive and product performance talked down, and financial problems, conflicts and competitive/markets threats talked up to push down valuations, confidence and restrict access to other sources of cash, in order to benefit a specific interest or investor group.
Liquidation effectively forced on founders, so that funds and attention can be redeployed to a competitor or direct rip-off.
Assigning disproportionate voting rights or controlling decision making abilities to an advisor, NXD or minor investor - which of course comes backs with truck loads of added pain.
Debt called in and then renegotiated at the worst possible moment, so that it either wipes everyone else off the share cap table and/or allows a minority group to take control of the company via the board.
Sneaky non-dilution clauses slipped into the very early funding terms, that limit future investment and leave the founders owning little - or none - of the pie at the end.
Director or shareholder refusal to approve the injection of new funds and dilution, or a new strategic partner/deal, in a way that allows a minority to take control of the board or share cap.
The whimper, not a bang, liquidation exit. Probably the most common and sad exit of all. The strategy isn’t valid, the market wasn’t there, the selling cycles were too long, there were product/supply issues, corporate competitors ripped the product off before it had time to get market share, lots of little mistakes and decisions made along the way added up, a corporate deal that never came sucked the startup of its time and financial resources. Whatever the root cause, the end is the same. The cash dries up and the ability, or the will, to find more simply isn’t there.
The face saving acquisition - the fanfare, the PR, the pats on the back, the buyer looks great, the founder gets the prospect of finding another job minus the toxic smell of failure. The £50 purchase price remains very much undisclosed.
And there are those zombie companies that just refuse to legally die. Administrative messes, missing major shareholders, or the malingering ‘making just enough money to justify keeping the server switched on’ that somehow no one left involved can move on from.
My purpose for highlighting some these exit myth-busters is not to put entrepreneurs off starting up (as if I could!). But if it is even a little bit scary, or is fresh news to you, then good. You're safer if you're properly informed. Your personal finances, your business and your decisions will improve if you restrict your delusions to the helpful ones.
The founders involved here have in some cases spent many years unpicking what went wrong, the little decisions they made at every stage that left them where they did. What they could or should have done differently. Some have reached an understanding and have learned, making very different subsequent choices. We too should listen and learn from them, to avoid making exactly the same mistakes and decisions.
Others are still too deep within the maelstrom unfurling around them to process or to even have an accurate understanding of what is happening and why. (For example, I spoke to two different startup founders clearly in the middle of being shafted in a classic debt leverage play - but neither had quite reached the realisation of what was actually happening to them, or yet understood that there were no good scenarios in which both they and their company would survive unchanged).
In these maelstrom scenarios your advisors to date - lawyers, accountants, board, angels - may well no longer be on “your side”. In some cases they legally can’t be, as they represent the interest of the company and who controls it, not you the founder or entrepreneur (even if you’re CEO). Well meaning, but inexperienced advice won’t help either - it's often just too complex, brutal and very fast moving for someone outside the business, who has never seen this kind of thing play out from up close, to fully comprehend the nature of the existential crisis you are in.
This is the time when founders most need to talk to people who have lived it, just talk - even when there are no good outcomes or possible solutions to be offered. Which is why airbrushing all but the most shiny, glamorous exits out of an eco-system’s collective conscience helps no one.
I want to challenge the assumption that an acquisition or exit is always good, and the ultimate success outcome that entrepreneurs and their teams should aspire to. That big pay day we are all working towards, as we sacrifice the basics now for untold rewards in the future….
Let's be more honest with ourselves and each others as founders and entrepreneurs - in private, or anonymously, if still gagged from speaking publicly - about what the exit really looked like. Because other founders do need to know just how many of us walk away from our big, high profile startups and exits without a penny (or much worse).
To really support a more informed view of what we’re all doing this for and the sacrifice/reward trade off we’re willing to make as individuals and teams, the wider startup ecosystem needs to engage. We need to move past the idea that success should be measured and celebrated by the amounts of investment raised, peak valuations and progress towards that inevitable big exit. That version of the happy ending serves only one interest group, and as the Fanduel example shows, it generally isn’t the founders, their early angels and employees.
And if, as a result, just one extra person says to me “I’m not thinking about the exit, or planning for acquisition in the next 3-5 years, my goal is to build a sustainably profitable business for the long term, however unsexy that sounds” then I will do my happy dance with a very happy heart indeed!
Rant over…. now let’s start a conversation.