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When is the right time to exit?

Quick recap of recent M&A — Yahoo sold for broadly 1/10th the price that Microsoft offered several years ago, Jabong sold for broadly 1/10th the price that was being discussed with global ecommerce majors a few years ago.

I have found that it is very difficult for an entrepreneur, management and/or investors to take a decision to exit when there is no immediate stress on capital — either when there is capital in the bank or there is an impending financing round. And this challenge amplifies when the company is growing as it can sometimes make a company less vigilant on potential future headwinds the company may face.

So when is the right time for a founder/management to start thinking of an exit, despite cash in the bank? Here are some tips -

People — There is fatigue or lack of passion at the founder or leadership level. Or it is hard to attract or retain key talent in the company. Or there is a strong disagreement amongst the various stakeholders on the way forward.

Approach — The approach to solving the problem is either not working or not scaling. Revenues cannot scale without scaling costs proportionately

Market — The market is either not large enough, or the competitive dynamics in the market puts pressure on current business model

Obviously the company must attempt to do whatever it can to address the challenges above and continue to build value and not give up at the sign of the first road bump. But what is important is that a timely and critical assessment is made on whether the company really has a strong passionate team focused on differentiated and scalable business model in a large enough market or are their certain team or market headwinds in the near to mid term that will be hard to surmount and it is best to find a strategic home for the company. This assessment is not only extremely tough in an ever changing dynamic market environment but also is emotionally challenging for the founder especially if there is strong passion for the company. And often the responsibility lies with the investors and the board to provide the sound and dispassionate counsel to the entrepreneur.

As we have seen in the recent M&A highlighted above, a mistimed exit of a company can cause major loss in shareholder value, employee morale and employee opportunity cost.

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