Ten Commandments of Exiting a Startup

Everything with a beginning has an ending.

Our third module for our Founder’s Journey class was the last mile of the founder’s journey. What does a successful exit look like? What can you do at the beginning of your founder’s journey to set yourself up for success in the end? How do you navigate the multiple pitfalls that you reach that could be the end to your start-up? What are the psychological impacts of the ups and downs of the founder’s journey on us and how do you manage the internal ramifications of this rollercoaster ride?

These are the questions we explored in this last and final module. Below are the most salient lessons we aspire to remember throughout our own founder’s journey one day.

1. Thou shall not fail destructively.

“Happy families are all alike; every unhappy family is unhappy in its own way.” — Tolstoy

“Successful startups are all alike; each failed startup has failed in its own way.” — HBS’ Founder’s Journey Course

If nine out ten startups fail, odds are that yours will too. So, if you are in the 90%, remember that there are three ways to fail:

1. Standard
2. Constructive
3. Destructive

Failing constructively or failing in the standard manner translate into keeping the doors open for you and your employees to have future careers or found another startup one day. Failing destructively means that you end up bankrupt, in jail, or impossible to hire in the future. Don’t sell cocaine on the side to meet payroll, lie to investors, or wait until the day you’ve run out of cash to let your employees know that there is an issue.

Remember, we are lucky enough to live in a culture where “failing fast” is all but applauded, where you will often get a second chance as long as you don’t ruin for yourself. VC’s will even fund someone who has failed, especially if they can answer the questions:

1. how did you fail
2. have you learned something from failure.

If you answer “destructively” to the first question, you are out of luck. So if you have to close up shop, be cognizant of the three ways you can fail. And feel free to fail in any way you want, as long as it’s not destructive.

2. Thou shall be an optimist, but don’t let past successes cause future failures.

You’ll find it nearly impossible to start and scale a company if you aren’t an optimist. You’ll have to convince yourself that you can succeed against overwhelming odds, recruit others to forsake job stability to join you on your mission, and even convince investors to part with their precious dollars and give it to you despite no track record and with a 90% chance of failure. Yet, if left unchecked, this optimism can turn from an asset to a liability if you let it spin out of control.

Don’t take our word for it. Learn straight from Curt Schilling, three times World Series winner, World Series MVP, and likely destined for the MLB Hall of Fame. Passionate about gaming, Schilling started 38 Studios, a video game development company, in 2006. By 2012, the company and Schilling were bankrupt and a had a massive lawsuit pending.

While performing an autopsy on 38 Studio’s course reveals many causes of death, one of the most important one was Schillings inability to stay grounded in reality. Not beholden to any investors as he had been personally bankrolling the company, Schilling refused to accept the facts on the ground — that the company would run out of money far before they could deploy a product. Moreover, biased by decades of success, Schilling took larger and larger risks as his company got closer and closer to grinding to a screeching halt. Only when the checks stopped clearing did Schilling come face-to-face with reality.

So how can you avoid Schilling’s mistakes? One strategy is to start by forming a personal board of advisors, who can keep aligned with reality when you are off selling your brilliant idea to everyone around you. Second, when your board of advisors or partners tell you that you are not in touch with reality, listen to them and truly assess the situation yourself. Optimism is a great thing, but as the saying goes, too much of a good thing…

3. Thou shall align your entrepreneurial motivations with your exit strategy.

Why did you decide to pursue a startup? Did you want to have a great learning experience, wherever that might take you, or did you think you had an idea that you could hit out of the park and retire early? Regardless of the reason, make sure that you think downstream about how that affects your exit plan.

Our class heard from Dulcie Madden, co-founder and CEO of Rest Devices, who led the company through an insane amount of adversity (running out of money, lawsuits with major companies, etc.), yet unflinchingly captained the ship, even when it looked like it had already sunk. When asked if she would have taken the roller coaster again knowing what lay ahead, the answer was a resounding “absolutely.”

For Dulcie, working at Rest Devices was not primarily about cashing out — it was about building a product, seeing it through to the bitter (or sweet) end, and following the trail — wherever it might lead. It is tough for many people to understand this motivation, but once you uncover motives, irrational decisions can suddenly appear logical.

If, unlike Dulcie, your entrepreneurial motivation is financial, there is a lot you can from the data. In 2016, 60% of exits happened at or before a Series B (see below). The vast majority of these exits were acquisitions. So, keep your sights on becoming the next unicorn, but know that most companies fail, so if you are lucky enough to get an acquisition offer, it may be in your financial interest to take it before things take a turn for the worse. Of course, that depends on the various weightings of your entrepreneurial motivations.

Tactical Note: When it comes to an exit, your investors have an equal or greater say than you do. Make sure you outline your exit criteria with them before an actual acquisition offer comes across your desk.

4. Thou shall remember that big dreams are achieved through a series of small wins.

With the benefit of hindsight, we marvel at Elon Musk’s grand vision to change the world and the great strides that his ventures have made towards those goals in the automotive, space, and energy industries. If we forget about his achievements for a second, it is not hard to realize that Elon Musk must not be the only person with these visions, nor is he the most technically gifted person to build electric cars or rockets. What is different about him and how does he motivate people to pour their hearts and souls to seemingly unattainable goals?

One key aspect that sets him apart is his pragmatism in pursuing his outlandish dreams. He has an almost unique ability to breakdown a big goal to multiple steps that are extremely challenging but not completely unattainable. This applies both on a personal level and on the business level (e.g. Tesla, SpaceX).

For example, although Musk is more passionate about renewable energy and space exploration than internet payments, he started his entrepreneurship career in the Internet industry, where it was much easier to build and scale a business in order to come away with a major financial exit. Only by pursuing Zip2 and Paypal was he able to accumulate enough wealth to fund Tesla, SpaceX and SolarCity.

At Tesla, according to Elon Musk’s now well-known Master Plan, although his end goal is to “help expedite the move from a mine-and-burn hydrocarbon economy towards a solar electric economy,” he started by building a $120k electric sports car to alter the perception of electric vehicles in the public eye, despite the price point being far too high for the average consumer.. It was not until 14 years after Tesla was founded that it started delivering the mass-market Model 3.

While this seems like a very indirect approach, it is worth nothing that even with production delays, the Model 3 is already outselling all of its “so-called” mass-market competitors, such as the Nissan Leaf and Chevy Bolt, each backed by automotive behemoths who targeted the mass market from day one and are backed by massive automobile companies.

As we can learn from Musk, entrepreneurs should not be afraid taking intermediate steps on their way to achieve a grand vision. While the path may be longer, you may still get there before everyone else.

5. Thou shall remember finances are only one factor in a startups ability to succeed.

According to research, running out of cash is the second most common reason that startups fail (see graphic below). As we were reminded again and again in our class, there is no such thing as negative cash balance. When a startup runs out of money, it is a good time to quit. Makes sense, right?

Not quite. Let’s start with the small sample of Founder’s Journey cases. Of all the successful ventures, which one did not experience a funding crisis? None. In fact, most of the successful ventures experienced at least one “near-death” experience: BlackBuck, Tesla, Pandora, Rest Devices. The list goes on. Entrepreneurship is a game of constantly pushing the limits of resources on hand and therefore being cash-constrained is often a frequently visited part of the journey.

As we have seen in many cases, raising funds of some type is almost always possible. However, at some point, it becomes a choice of how deep the founders are willing to get into personal financial debt.

The ultimate test of closing shop should be how much the founder still believes in the vision and the company’s chance of achieving the goals with the resources he or she can afford. If the founder still believes in the business, the question would then be how he or she can find resources to help the company reach its goals. If all entrepreneurs closed their business when they were close to running out of funding, there would be very few startups left in this world.

6. Thou shall know the limits of your “success blueprint.”

Peter Thiel, Kevin Ryan, Elon Musk, Steve Jobs… The world seems abundant with celebrity serial entrepreneurs who lead us to believe that one success fuels the next because of some secret sauce that these figures have discovered. However, as exampled by Curt Schilling in 38 Studios and Dean Kamen with Segway, past success in one domain does not guarantee success in another. In Schilling’s case, past success as an MLB pitcher did not translate to success as a CEO; for Kamen, past success with developing and licensing inventions did not translate to success in developing and manufacturing Segway. In fact, past success in one domain can fuel hubris that leads to failure when a “success blueprint” is applied in a different context.

What is different between the Kevin Ryans and the Schillings and what can we learn from them? While external factors and pure luck may come into play, there are some consistent patterns between the serial successes and failures. While paths to success are hard to find, there can be many recipes for failure. Being on a winning streak is like walking on a tightrope — it is fundamentally an unstable equilibrium and takes tremendous discipline to stay on track.

For successful people, the most important thing should be to reflect on their past success and identify BOTH their success formula AND their vulnerabilities. If one day, we are unable to explain our own success, we should be very concerned. In many cases, the best way to secure the next success is to keep applying the same success formula over and over — but this only holds true if you are applying the formula in the same domain. The formula can be a combination of personal attributes, expertise, passion, experience, support network, and etc.

Life is short enough that any entrepreneur is lucky to find even one success formula. Human nature is such that once we find one success blueprint, we are tempted to apply it to everything else — even where it makes no sense. Many successful people have failed for this reason, Curt Schilling and Dean Kamen being just two better known examples.

7. Thou shall insulate your stakeholders from your startup’s failure.

If your startup falls into the 90% that fail, there are three stakeholders you need to be cognizant of — customers, investors, and employees. If you decide to close shop, you want to be thoughtful of how you can ease the process for these three different groups.

In class, for example, we read about company called Triangulate that went through many iterations to develop a solution for the online-dating world. Less than a year and half into the company, Triangulate was running out of money. The company had gone through a few pivots and was at a point where it lacked clarity and traction for the end-product. The founder, however, had recently hired two new employees, who left their previous jobs to come to his startups.

Ultimately, with $200,000 left in the bank, the founder decided it was best to use that money to dissolve the company responsibility by first, helping his employees find new jobs and, second, giving as much back to investors as possible. By doing this, the founder was able to protect his relationship with both his investors and employees to the point where his former cofounder is one of the limited partners of his new venture fund.

The crux of this story is that when you’re in the rollercoaster of a founder’s journey it’s easy for you to respond instinctively. This may be an instinctive response to continue onwards no matter what because you don’t want to “fail.” Alternatively, your initial response may be to think about yourself: your self-preservation, your career, your ego. Pause and ask yourself:

“If I look beyond myself, how can I make sure I do the right thing by everyone?

This will likely take you on a much better path than responding instinctively or focusing on yourself.

8. Thou shall refrain from negative self-talk.

According to research, forty-nine percent of entrepreneurs will suffer from some kind of mental illness, such as depression (compared to thirty-one percent in the average population). Is this there a selection bias in who decides to become an entrepreneur or is this a ramification of the founder’s journey? While there aren’t clear answers to this question, there are tactics founders can adopt to help prevent themselves from developing depression, severe anxiety or other mental illnesses. How can you be in the fifty-one percent that escapes without any mental health issues?

To start, be conscious of the words you use to refer to yourself, your choices, and your startups success. Research shows that mental well-being is positively correlated to subjectively perceived success of a startup, but NOT correlated to objective firm performance. Read that again. Now one more time. This means if you believe that your startup is successful, regardless of objective metrics, you will have better mental well-being.

There is no such thing as neutral sentiment. The words we use either heal us or poison us. Everything is about our framing. In these tough moments, remember your own stories of success and resilience within the founder’s journey. Remember these words of wisdom from the book Heart Talk:

“Since our thoughts are what frame our lives, the first step to constructing healthy thoughts. Healthy thinking does not mean you never have dark thoughts; it just means that you don’t stay in unhelpful thoughts long enough for them to influence your reality. We become the stories we tell ourselves, so it is crucial that we, as narrators, frame our experience with thoughts that heal, nurture, and motivate us.”

We are the narrators of our lives. Own that role.

9. Thou shall focus on the journey, not the destination.

One of the ways founders can maintain a positive mental state throughout the ups and downs of the journey is to focus on the journey and not the end-result. Learn to be excited and driven by the learning process and the day-to-day hustle, in spite of the challenges, rather than focusing solely on the extrinsic factors such as financial success, company size, reach, etc.

The founder’s journey is like an equation. As much as you aspire to, you cannot control the output. You can only control the input. Focus on relishing in this part of the equation you can control. We know this is easier said than done, so below are three tactical suggestions:

1. Break up your big goal into bit-sized “small wins.” Rather than putting “landing $10,000 in grant money,” you can have on your list “apply to $50,000 in grants.” This makes your success tied to your actions and not the results.
2. Have a systematic way to show gratitude daily. When we focus too much on the negative, our mind can fall into the “Scarcity Trap.” This means our belief in the is scarcity of a resource pushes us to act in self-limiting ways. We make irrational decisions because our mind literally falls into a “tunnel vision,” and we cannot cohesive of alternative options. You can learn more about the scarcity trap in this podcast. Ultimately, an attitude of gratitude can help keep us positive, open and creative. This can be achieved through meditation, keeping a gratitude journal, having a “gratitude moment” at the beginning of each meeting, or remembering to express gratitude whenever you’re talking to a friend on the phone.
3. Keep a running list of lessons learned. No matter how your startup performs financially you will definitely learn a ton through the founder’s journey. If you want to use your own growth and learning as a measure of success, document it. Throughout the day, you’ll learn something. It can be a tactical takeaway of how to write a successful grant application or it could be a major reflection on your leadership style. Document it. Write in a notebook you carry with you. Put it in the notes section of your iPhone. Write a quick email to yourself and have a consistent, distinctive subject line such “Lessons Learned” so you can easily search and find all lessons in the future. Documenting your growth will help you remember in your darkest moments that you’ve truly become a better person regardless of how the world might see your startup’s performance.

10. Thou shall not let the founder’s journey define you as a person, regardless of success or failure.

Your journey as a founder is only one part of your life. Regardless of how this journey plays out for you, remember to never let it define you as human. Research shows that entrepreneurs that struggle the most are ones treat their “perceived financial problems and poor venture performance as a threat to their self- image and even their identity.”

Don’t intertwine your identity too much with your startup. If your company fails, it does not mean you are a failure. If it succeeds, its success is due to hundreds of factors, including luck — so don’t take too much credit.

You are not just a founder. You are a friend, a sibling, a colleague, etc.. You are a person with a life, who affects many others lives, and has a lot to offer the world. There is more to life than work, and it would do us well, especially to us over-achievers, to be proud of who we are as humans rather than tie our fate to that of our entrepreneurial ventures.

Written by Sana Mohammed, Ethan Li, Zander Sebenius (Harvard Business School, Class of 2019). This is the last of our three-part series. Thank you for following our class journey!