Sep 292023

The term “exit” always irritated me when people write about startups. Especially because it only happens when a company is either bought or IPOs. I’m not saying that startups don’t use acquisition (or IPOs if you’re Twitter – never X) as an exit strategy to avoid actually making money, but a lot of times companies do this after they’ve become a profitable, self-sustaining business. Despite that, we still don’t have a clear definition of when non-retail companies stop being startups and start being plain old businesses (even if they’re small), and it needs to be fixed.

I’ve worked for 2 “startups” that were acquired while I was there. Both times, they were already profitable by the time I came on, and either weren’t seeking additional investment or were completely bootstrapped. They weren’t really startups by the time I got hired, but were referred to as having “exited” in news stories about the deals when other (publicly-traded) companies bought them. Never mind that there are several, rather big-name companies that have been traded on the stock market for years that still run like startups (relying on people investing outside cash into their business and regularly spending more than they actually have in revenues, and hoping this continues indefinitely). In other words, the companies I worked for that were deemed to have now officially “made it,” were better businesses than some of the examples of “grown-up” companies that were allegedly “already there.”

This trend really only seems to apply to businesses that aren’t retail. If you sell anything outside a regular storefront, you’re a startup until there’s a stock ticker symbol associated with you. This is ridiculous. We’re (allegedly) all for small businesses, so why aren’t we taking small B2B or mail order businesses seriously? It’s time to start acknowledging that businesses stop being “startups,” sometimes long before they’re acquired or IPO.What’s really needed is to start enforcing a common definition. How about this one – “A company ceases to be a startup when it has been profitable for 3 consecutive years” (Yes, that means Twitter is still a startup, despite being a massive corporation that was publicly-traded until Musk bought it – that’s because the stock market is a BS engine more than it is a system for rational investing).

If we stopped treating going public in some fashion as the ultimate goal of startups, could we have a better startup ecosystem where the goal becomes to get financially stable and self-sustaining instead of a big flashy IPO (with an initial stock price that always seems to drop significantly after the initial buzz fades), or a major buyout? This is especially true for startups that already targeting consumers, or selling generalized products targeted to all businesses, or at least across an entire industry. More businesses that are consistently making money means more competition, which leads to more options for customers, which leads to a greater net availability of products and services.

This means that businesses will need a new approach to getting initial funding, since startups looking to “exit” by becoming stable businesses is at odds with how venture capital investments work. At that point, small business funding would typically take the form of loans, crowdfunding campaigns (for B2C companies), or incremental organic growth. It would be for instances where the business has something that can make money, and is focused the up-front capital investment needed to scale things out.

Maybe the takeaway from all of this is that high-usage tech companies stop becoming outsized influencers on the economy, aggregating demand and choking out everything else. The problem right now is, there’s no real incentive for companies starting out to go that route. Part of that is that these businesses are being launched when there’s an idea and a minimum of implementation (if that much), instead of when there’s a prototype and now the funding is needed to take the time to turn it into a proper product or service on a larger scale. It’s a lot easier to complain about that with software, where there’s a minimal initial cost to building and getting an initial version out there. Software doesn’t cost money per each unit, especially if you’re writing cloud-based software (and who isn’t?). For people who have material and production costs, that’s a different story. Maybe they do have viable prototypes and are getting VC money to ramp up production already. Given that we don’t refer to businesses with physical goods as startups for as long as we do tech companies, it’s very likely they’re already doing this, and tech companies are just ignoring it because they think they’re magically different.

Our refusal to consider “startups” as real businesses until they’re publicly traded (or part of a publicly traded company) creates a set of incentives that aren’t particularly helpful – to the businesses or to the economy as a whole. More startups would likely end up being successful if they didn’t feel the need to provide a big payout to their investors. This runs at odds with venture capital firms that are the traditional source of investing for these companies. I still think changing how we think about startups and when they stop being a “startup” and start being a “business” can help encourage more new companies to get sustainable, and then pursue a big IPO or buyout on a stronger foundation. Perhaps a focus on getting to sustainability will encourage the sort of practices that startups tend to ignore early on, like customer relationships and profitability.

Starting a company where the only paths to “success” are a major IPO or acquisition seems like a strategy that makes failure more likely than not (especially if your “exit strategy” is IPO – you should actually be making money before that part). Focusing on longevity and stability doesn’t remove the option of getting bought out or going public later, it just makes them options rather than ultimate necessities. It means a different approach to initial financing, and growth may not be as fast as you could with VC funding, but you’re also more likely to be 1 of the 80% of startups that make it past the first year.

 Posted by at 11:45 AM