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What’s your endgame?

What’s your endgame?
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First Published: Sun, Feb 14 2010. 07 40 PM IST

Updated: Sun, Feb 14 2010. 07 40 PM IST
Before Naukri went public, one of the questions that we used to be asked frequently by friends who were in the venture capitalist (VC) community was “So what’s your endgame?”
We used to struggle to explain that we did not have an endgame in sight. We had a long-term view on our company and wanted to build a world-class, world-scale company based out of India.
This was an answer that usually failed to satisfy the questioner. It seems they expected every company to have some sort of “endgame”.
The fact is that while an investor may have an endgame for an investment, entrepreneurs are often in it for life.
One of the many things that we did not understand while raising our first round of investment back in early 2000 was why VCs would insist on a time-bound exit for their investment —whether through an initial public offering (IPO) or a strategic sale or a promoter or company buyback.
After all if the company is growing well and is profitable, why not stay invested indefinitely? Sure, if an IPO or a strategic sale does happen in its own sweet time—great. But why the dogged insistence on a deadline for a liquidity event?
Smart moves: Don’t start a company with a strategic sale in mind.
At that time we did not realize VCs are not investing their own money. They usually raise funds from other investors for the purpose of creating a venture capital fund. And there is a date by when they have to return the money to their investors along with the return. The life of a fund typically ranges from seven to 10 years. Hence, venture capital investors need to have a time-bound exit. They don’t have a choice—it’s not their money. Their investors won’t wait indefinitely.
Your preference for the type of exit you would like to create for your investor would depend on your own goals. If you too are seeking to cash out and earn your pot of gold, you would prefer a strategic sale. However, if you are seeking to build a large company over a longer period of time, you would go for an IPO.
Many entrepreneurs start a company with the idea of becoming wealthy through it in the near future. They focus less on building a viable business and more on positioning the company for an acquisition by identified potential buyers. Barring a few notable exceptions, such entrepreneurs are not successful since they expend their energy on the wrong things and fail to create a valuable business.
Most entrepreneurs who end up being successful do not start a company with a strategic sale in mind as an endgame. They believe in the long-term potential of the business and they are passionate about what they are doing and so would be perfectly happy to do it for the rest of their lives. And, yes, if at any point in time a strategic sale becomes inevitable or if it becomes the best way forward and if the right opportunity comes around, they may go for it. The personal wealth they end up creating is usually a happy incidental outcome of creating a valuable business, but it wasn’t the goal they began with.
A strategic sale usually means that the entrepreneurs too exit along with the VC. Sure they might stay for a year or two to ensure a smooth transition or there may be an earn-out period but eventually there is a likely exit for the entrepreneur to do his next thing—whatever that may be. Fundamentally it means that the entrepreneurs will lose their company. This is something you need to reconcile to if you are taking this route.
An IPO has a number of other advantages—you raise more capital, your stock has currency and you unlock more value. But an IPO usually ensures that entrepreneurs find it hard to exit the company even if they wish to at a later stage.
Frequently you will have this decision—of whether to do a strategic sale or an IPO—taken out of your hands. You may have built a great asset but it may not be of a size and scale where you can go public—the only viable alternative may be to do a strategic sale.
As an entrepreneur you may have a 20-year view on a company; however, your investor will not. It is up to you to create conditions to provide an exit to your investor within an acceptable time frame. If you are unable to, chances are you will end up wishing you hadn’t raised the money in the first place.
The author is co-founder and chief executive officer, InfoEdge (India) Ltd, which runs the Naukri.com website. He writes a monthly column on careers and enterprise.
Write to Sanjeev at onthejob@livemint.com
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First Published: Sun, Feb 14 2010. 07 40 PM IST