Reflecting Before an Exit

This piece, written by Carter, was originally published by the Wall Street Journal in a section called “The Accelerators.”

The strong pace of initial public offerings in 2014 and the first half of 2015 has many entrepreneurs contemplating if, when and how to look for an exit. Even though the IPO window may be closing for the moment, delicious deals like Shake Shake or Fitbit may encourage exit-minded founders to prepare for an IPO.

Entrepreneurs have to consider a myriad of challenges that come with preparing for a liquidity event. Before even contemplating prospectuses, entrepreneurs should step back and reflect on the emotional and psychological aspects of selling — whether through an IPO, to a private equity firm or to other third parties. Relinquishing control of “their baby” may be harder than entrepreneurs realize, and selling to a buyer who has a far different vision for the company may lead to regret. It pays to keep a few things in mind:

Are you truly ready to give up control? It may seem obvious, but in the intoxicating rush to an exit it can be easy to overlook the fact that selling the company means giving up control. The emotional and psychological impact of selling the company may be underestimated by the entrepreneur, even when gaining access to more capital resources appears to make sense, at least on paper. Though selling may be the right thing for the business, entrepreneurs shouldn’t jump to make a deal without first determining their own readiness. Entrepreneurs need to ask themselves: Am I prepared to hand over the reins or, at the very least, share control of what I’ve built?

To thine own self be true. It takes a tremendous amount of self-awareness for entrepreneurs to admit, even to themselves, that their company needs a different leadership profile, a broader managerial skill set or a more experienced management team to take it to the next phase. It’s rare for a founder to conceive of and start a company, find that elusive “product/market fit,” take it through the early hyper-growth phase and lead it into a sustained-growth scaling phase. In other words, launching a company and willing it to $20 million in revenues takes one (extraordinary) skill set; scaling it into a $150 million entity takes another. Entrepreneurs must consider whether their expertise lies in early-stage product and business development, or if they have the requisite skills to scale a business by doing such things as expanding into new markets, creating scalable processes and broadening their marketing and selling efforts, while also dealing with an ever-growing group of stakeholders.

“Prince Charming” doesn’t exist. Sometimes what looks like the “perfect” deal comes along — for example, the seemingly ideal match of Trunk Club, the online men’s clothing service, with Nordstrom in a $350 million acquisition in 2014. But for most companies looking to sell, holding out for perfection raises unrealistic expectations that are almost guaranteed to result in disappointment. Or, hoping to sell at the peak can leave a company stranded when an unfortunate turn in the market comes along. Being patient in order to find the right strategic and cultural match is one thing; attempting to ride a crest wave or waiting for Prince Charming to come riding in, offering a mind-blowing multiple on forward-year revenue projections is entirely another. So understand your priorities and be prepared to pull the trigger if and when they’re met.

Are you aligned with the prospective buyer? As entrepreneurs look for an exit, especially through a merger or acquisition, they need to understand the vision and values of the buyer. Is there a meeting of the minds, a shared vision on the future direction of the company? Does the potential buyer want to accelerate growth and expand into new markets or does the buyer really want to take the core assets and shutter the rest of the company? Will the legacy of what the entrepreneur created live on, or will it be “assimilated into the Borg?”

Who’s looking out for the team? An exit is not just about the entrepreneur. Successful startups grow because of a team’s efforts, and that team has a tremendous amount of product, customer and institutional knowledge to offer. Before sealing the deal, entrepreneurs need to make sure valued team members have the right incentives and protection to stay with the company to continue its growth strategy, or conversely that they are rewarded with severance packages that take into account their contribution.

As these points illustrate, looking for an exit takes more than analyzing ratios and multiples or cashing out in the most lucrative deal. Entrepreneurs who take the time to consider the emotional, psychological and strategic aspects first will be better positioned to make a successful transition to what comes next.

For Biggest Results, Focus On The Struggle

This is from a piece Co-Authored by David Schonthal and Bob Moesta, CEO of the Rewired Group (Originally published as a contribution Dave Kerpen’s column Inc Magazine):

Successful innovative products and technologies start by focusing on the consumers’ problems to be solvedWhat do consumers really want to do? What are they trying to do but cannot? What are the tradeoffs they are willing to make to achieve better outcomes?

The solutions target consumers’ functional, social, and emotional needs and, even more important, their desired outcomes. Think Maslow’s Hierarchy, with its tiers of psychological, safety, love, esteem, and self-actualization needsThe further aproduct‘s benefits extend up that pyramid the better chance the company will tap intomassive pent-up consumer demand for innovation. One example might be Fitbit and similar products that perform functional exercise- and diet-related tasks, but on an emotional level are really about delivering personal accountability and motivation. 

Identifying struggles also unlocks insights about consumers’ decisions to “fire” the products and services they’re currently using in order to “hire” new ones that promise to do the job better, faster, more efficiently, more cost effectively, etc. Yet such actions aren’t as obvious as swapping out one household cleaner for another. For example, Facebook appeared to create a new category in social media. But when examined through the lens of consumer struggle, it becomes clear that Facebook was hired by consumers to update friends and family on what’s going ona job that used to be occupied broutines such as the Sunday night family phone call. In terms of industry categories, Facebook doesn’t compete with AT&T, but in the consumers’ minds, even unconsciouslythey do. 

Consider BucketFeet with its trendy and colorful line of casual footwear featuring designs by independent street artists. As a shoe company, BucketFeet would appear to go toe-to-toe with megabrands such as Nike and Converse. But in consumers’ minds, BucketFeet is really wearable artdesigns on a different kind of canvas.

Consumers’ “hiring” and “firing” decisions are significant sources of insight becausethere really aren’t any new jobs for the latest products to assume. Consumers’ overcrowded lives can’t handle one more thing. For entrepreneurs, that reality is a compelling case to stop focusing on the features and benefits of what they’ve invented and developed, and instead put their emphasis on moments of struggle and consumers’ hire/fire decisions.

Successful innovation starts with finding the right struggle to solve. Many techniques such as the Jobs-To-Be-Done framework for consumer research and Design Research have long been applied to corporate innovation. The same approach can be utilized by startups.

Identifying moments of struggle can be accomplished by conducting research with asfew as ten people if the questions and observations are of sufficient depth about how and why they buy and use products and technologies. Go into people’s homes and witness how and what they are using. Study how they adapt products and technologies with their own workarounds and hacks, and improve or even push the limits of performance. Such small-scale but intensive ethnographic studies level the playing field for small startups and entrepreneurs who don’t have huge research departments and massive consumer databases at their disposal.

The key is to frame the forces of progress (function, social, and emotional) that causepeople to make progress in their lives. As the “Forces Diagram” (below) illustrates, the push of the situation and the pull of a new idea are weighed against the habit of current practice and the anxiety of adopting a new solution. Progress only happened when the push and pull are greater than the anxiety and habit.

(Sources: The Re-Wired Group)

Most consumer struggles from the functional to the emotional can’t be hypothesized in a research lab or conference room or sketched at a white board. Doing that runs the risk of targeting the wrong market or a need that really doesn’t exist. Consider the Segway, an intriguing personal mobility device that looked like it addressed a real functional need, but doesn’t target consumer struggle with a solution that allows them to make progress.

Just because something is possible, doesn’t mean that consumers will clamor for it en masse. 3-D printing is a great technology, but still largely in search of a mainstream job. There are interesting applications, such as in making custom hearing aids, but no one has yet found a widespread use for this influential technology. Feasibility and desirability are not the same and need to be thought about differently.

Consumers are the source of most successful innovations; their desires and struggles are the sparks of genius that lead to disruptive opportunities. Technologies are the enablers to make it easier, faster, lower cost, or just betterHenry Ford understood this, noting that people didn’t know they wanted an automobile. What they wanted was a faster horse. What followed was the firing of horses to transport the masses and the hiring of automobiles that could do the job better.

In the same way, entrepreneurs today need a keen understanding of human behaviorand consumer decision-making. By focusing on moments of struggle and real problems to be solved, even small startups can compete head-to-head with big companiesand win.