Apple CEO Tim Cook was speaking to students and said if a VC changes in the middle of a pitch and quizzes an entrepreneur about an exit strategy they should leave. I find that interesting. One time when I was watching Tom Sosnoff on Tastytrade’s Bootstrapping in America he said he never wanted to invest in an entrepreneur that had a pre-defined exit strategy. Tom was a great trader and built Think or Swim. He knows what he is talking about.
Why not build a blow out company? Then you don’t need to worry about the exit.
Entrepreneurs who only tell me how much money I will make usually don’t make me any money. So, there is some truth to what Cook is saying. Cook’s reasoning is that the VC is in the game for a quick buck and don’t really want to build a company. It’s a good point.
If you are going to take the risk and go through the pain and suffering of building a company why not make it a huge one?
Some VCs will screw up a deal trying to make a quick buck. They want their track record to look good so they can raise more money. As an entrepreneur, if a VC is consistently on you to raise money at a higher valuation or exit, you should question their motives. They probably just want to make themselves look good not your company look good.
At the same time no matter what company you start there is a high probability that the end game will be a buyout by another company. Very few companies get big enough to IPO. As investors, it’s important for us to think strategically and critically about the potential exit at the beginning. In our case, we won’t make an investment unless we think that investment exit will pay for our entire fund. That means we have to game it out at the beginning being pretty careful about check size, amount of equity we hope to own and where the company can go.
But, as we have seen with macroeconomics, predicting the future is rarely correct.
There is a corollary to when I traded on the floor. Some trades you did because you were building a position. You intended to hold them over a period of time. Some were intended to be held for minutes, cycles as a market traded through a range. Some were opportunistic and were exited in seconds. Your strategy could depend on your emotional state and other things going on in your life. Could depend on your appetite for risk. Did you lose on your last trade or make money? There was a lot of psychology that went into it.
When you are startup investing, there is only one answer. Build a position. The risk/reward on the other stuff makes zero sense. That means as an investor it’s important to make sure your goals line up with the entrepreneur goals. It also means you can only invest in entrepreneurs that intend to build really big blow out companies. The big idea. The investor psychology has to be that they are in it for the long haul. At each touchpoint along the way, an opportunity to exit might avail itself and it has to be taken seriously. But, that’s the mechanics of a deal and has nothing to do with the original premise of why you invested.
So, Tim Cook is probably right.