The Seven-Year Itch (EXIT) for Startups vs Seasoned Business Owners
There is a fair amount of evidence that SEVEN YEARS brings a “breaking point” in both one’s personal life and business life. According to Wikipedia, the seven-year itch “indicates cycles of dissatisfaction not only in interpersonal relationships, but in any situation such as working a full-time job or buying a house, where a decrease in happiness and satisfaction is often seen over long periods of time.” My objective here is not to debate the personal side, or human psychology of the itch, but to put this phenomenon into perspective for aspiring entrepreneurs and seasoned business owners. The seven-year itch is about planning a successful EXIT.
The Seven-Year EXIT for Startups
This should come as no surprise to any entrepreneur who has raised investment capital, or is planning to raise capital, investors expect to cash out within seven years. Many angel investors will tell you they want out within 3-5 years, but certain VC’s plan on a longer time horizon to maximize their returns. They are looking for home runs (30x returns), not just doubles and triples.
I’m a big fan of shorter exits, but unfortunately the trend is toward longer exits. The biggest mistake I made as a venture-backed entrepreneur was not exiting early enough – and I made this mistake TWICE. I ran Ask-Me Multimedia for ten years and iCopyright for twelve years. I paid a high personal and financial price in both of those startups. Everyone was telling me to “hang in there” when I should have been getting out.
Source: National Venture Capital Association
Putting aside investor objectives and ROI, the bigger issue for entrepreneurs is the “opportunity cost” to stay with any venture longer than seven years. Most entrepreneurs get the “itch” to do bigger and better things in life. They have other ideas. They want to pursue other interests. It’s hard to do those things when they are still knee-deep in building a company. Startups are all-consuming.
The absolute worst situation for an entrepreneur is to become stuck. They haven’t planned wisely for an exit, or feel obligated to their investors and team to slug it out when there is not an exit in sight, so they stay on way past the time their passions and peak performance are driving them. Like a person stuck in an unhappy marriage, they simply go through the motions and die a little more inside each day.
These languishing startups are also bad for investors, because they become “stuckholders,” their money trapped in startups that have become the living dead. I often joke to my colleagues that I don’t need tax shelters or offshore investment havens. I hide my money in startups. The money goes in, but never comes out.
“Many young entrepreneurs don’t understand that the average company takes seven years to build to some sort of “exit,” and, as a result, the biggest gamble that an entrepreneur takes is actually the opportunity cost of working on another idea or in another company. Before they truly commit to the business by raising capital from VCs, they should really understand all the risks and assumption of the business as well as decide if they are truly passionate about the business they are building. Seven years is a very long time – invest in yourself wisely.” ~ William Hsu, Co-founder, Mucker Capital
My advice to all entrepreneurs: heed the seven-year exit rule. Get out while the going is good, get out while the going is bad. Just get out within seven years.
The Seven-Year EXIT for Seasoned Business Owners
Some people buy a company, inherit the family business, or start and build a company with no outside investment capital (other than perhaps bank loans). There is no internal or external pressure to exit within seven years from the time the company is started. In fact, these businesses are started as careers but become avocations. They provide a great lifestyle. Smart business owners eventually set them up to practically run themselves, which gives them time and money to pursue other ideas and interests. I know business owners who own three or four of these types of businesses. It’s a different dynamic than high-growth startups fueled by outside investors.
For these business owners, the Seven-Year Exit is still a real thing – a hard and fast rule – but applied in a different way. Unlike VC-backed companies that should start and exit within seven years, these businesses can be run for decades, BUT require seven years to sell. I do lower-middle-market mergers and acquisitions ($3M to $25M) for these types of businesses. The optimal exit takes seven years from the time the owner decides to sell.
Of course, many small businesses try to accelerate this process. Some are successful, but most are not. Only about 30% of businesses offered for sale will sell at all. And that’s because the owner undertakes a hasty process and does not take the time to optimize revenue and operations before putting the business up for sale. Some sellers get all the cash at closing, but most do not. The vast majority of sellers have an earn-out or note for at least 20% of the price. Ask any seasoned business broker or M&A pro and they will tell you the process to sell a business for the optimal price takes about seven years from start to full exit. So, if you are looking to be completely out and sailing the world by age 65, start the process of selling your business by age 58.
In a future post, I will break-down the seven-year process of selling a business for the optimal price, whether a venture-backed startup or seasoned business owner, particularly the most important part of the process – optimizing revenue and operations. Stay tuned…