No Exit for Nintendo

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Voices


I started Puppet Labs in 2005. We grew to three people in 2008, and had 231 employees at the end of 2013. Along this path of building a company, I’ve been asked all manner of questions, and they vary depending on the stage of the company or the questioner. One question seems to be persistent, and it became more common when we took our first funding round in 2009. It has become downright rampant since we hired Bill Koefoed, our first CFO, in December 2013.

That question: “What’s your exit strategy?”

I’d like to explain why we don’t have an exit strategy, and why no one trying to build a great company should.

Until recently, my answer to the question of an exit has been pretty consistent: The best way to have a great exit is not to need one, so I’m focusing on building the best company I can by solving the most pressing needs of our customers. I’m confident that we’ll have a great outcome as a result.

Going back to the exit question, any new company has four basic potential outcomes: Go broke, get bought, go public or stay private forever. Two of those options — going broke or getting bought — are certainly exits, but the other two options have the company continuing to exist as an independent entity. Yeah, sure, you can talk about individuals having exit strategies, rather than just companies, and you could conceivably be an entrepreneur trying to build a company to the point where you can sell all your interest in the company, but … why? What are you doing building a company you don’t want to have a long-term interest in? A company built without passion — and with an end goal of making a few people filthy rich — is a shortsighted company not built to last. Everyone has their own motivations, but I can’t conceive of building a company whose success is measured by anything but customer happiness.

I’ve seen an even more troubling trend recently, where someone takes money and builds a high-growth, high-intensity company. You can operate at that speed only for a little while, though, so, about the time everyone starts to burn out, and everyone realizes that it’s a marathon and not a sprint, they sell the company. The entrepreneurs take a year off, the investors make good money, and now all the employees can catch up on sleep in their boring new jobs, leaving the customers out in the cold. Then the entrepreneur starts the whole cycle all over again.

I hear many Silicon Valley companies and investors talk about this model like it’s a success, but the only ones I see happy about it are the investors and entrepreneurs. However, if you build a company for the long term, you align everyone’s incentives. The investors get a much larger return on a more mature company, you keep all the promises you made to your customers, and your employees can stay with the company they helped build, and love.

Now, given our stage of growth, and our recent hire of Bill, I keep getting asked about an IPO, so my answer has to change a bit:

An IPO isn’t an exit.

At least it’s not for me, for our management team, any of our employees or any of our long-term investors. If we brought our company public, and all insiders sold all of their stock in the public offering, we’d have a bloodbath, not an exit.

An IPO is a means for a company to bring in cash, not the end of the game. The whole point is to raise money from public market investors so you can continue scaling and improving life for your customers. An IPO does have the happy side benefit of making existing shares more liquid. This doesn’t mean that all those shares turn to cash immediately. They aren’t allowed to, and if they did, that would cause a massive drop in the share price, because of oversupply and a sudden loss of trust by the market. That’s in no one’s best interest.

I started Puppet Labs because I saw both an opportunity and a problem in the market, and I’m trying to build the best company I possibly can to solve that problem and meet that opportunity. At some point, I might no longer be the best person for the job, but I literally can’t conceive of doing anything other than building a company able to tackle the problems that are most painful for its customers. The only way this could ever become boring is if I do a bad job of it and get crushed by the market. I can’t imagine quitting a company because its customer’s problems are too hard, but “boring” would drive me right out.

I once had an employee ask, “What happens if Puppet’s not the answer to our customers’ problems? Shouldn’t we be looking into whether we should start another company to solve those other problems?”

No way.

First, no single company could ever be the answer to all of its customers’ problems — the market moves far too quickly. But, if we’ve picked great customers with hard problems, and built a great team for solving those problems, we’ll never run out of opportunities. If we picked the wrong customers, don’t know what their biggest problems are or have the wrong team, well, we’ve got our marching orders then, don’t we?

Either you’ve done well and are crazy to walk away from it, or you’ve messed up somehow, and you’ve got an obligation to do your best to get things in shape. A personal exit strategy is a sign of a lack of commitment, not a sign of maturity or success.

So, no, Puppet Labs does not have an exit strategy, nor do I. Our mission is to help reduce the cost of technology change for our customers, so their technology is their competitive advantage. We think the best way to do that is to stay independent. While I can’t guarantee we’ll succeed, it’s our goal, and we plan to stick at it for as long as they’ll let us.

Luke Kanies is founder and CEO of Puppet Labs. Follow him @puppetmasterd.




5 comments
anshublog
anshublog

This is an example of "VC speak" making its way into common language. VCs absolutely need an exit strategy - this is fundamental to their business - its not an option. As a VC you are investing other people's money and at some point (5-7 years later), they want to be able to get their money back and the returns. Giving them equity in private companies won't help because its not real money or exchangeable for money. So you NEED an exit. 


The entrepreneurs have the OPTION of getting partial or complete exit concurrent with their investors. Many choose not to - look at what Larry Ellison has done over 30+ years, and Michael Dell who just doubled down.


Great entrepreneurs want to build great companies. Investors want the ability to get their money back for practical reasons.

Herezathought
Herezathought

While I understand and appreciate skepticism toward entrepreneurs who seem too eager to build a company to flip it, I am also wary of people who believe that they demonstrate commitment to an idea by rejecting any alternative to stratospheric success.   Neither the investors and employees nor the idea itself deserve to be chained to a single goal.


How valuable is a batter who would only settle for home runs?

Muthuswamy N
Muthuswamy N

Great companies don’t have an exit strategy by Luke Kanies, Puppet Labs, through the link given by Mr Kumar B for whom we community members should be thankful, is not just a great read but should be internalized and acted upon by the members of this community. Rarely you get advice of this standard!

I believe in everything that is said in this blog, practice it to the extent I have included most of the points in my will for the limited company I founded, before reading this article. I was happy to know there are like minded people, after I read it.

First of all there should be a difference between building an institution that lasts far beyond you and starting a company with the objective of making a few million bucks and close it down or hand over. The level of commitment you bring to the institution you start and therefore what is transmitted to the team in your company is very different. The difference is between long-term institution building and ‘ make hay while the sun shines’ and close down or sell in the short term, silicon valley start ups’ approach. Obviously the latter cannot be anywhere near an excellent company and the internal satisfaction for everyone including the founder is indescribably great in an institution building exercise.

An IPO is certainly not an exit option for institution builder. Already my company share value ( not marketed yet) is 4 times the investment.  Even this I have put in my will that the only reason our company will go public is that the funds that will come will be needed for facilitating the problem-solving of our customers and nothing else.

The only place I differed with this blog was when he says: “But, if we’ve picked great customers with hard problems, and built a great team for solving those problems, we’ll never run out of opportunities. If we picked the wrong customers, don’t know what their biggest problems are or have the wrong team, well, we’ve got our marching orders then, don’t we?”. I don’t differ in the total sense of these sentences but in classifying customers as good and bad.

To us in our company there is no good customer and bad customer. All customers are good because, if they are not there, we are not there! Nothing like taking a customer whom we think bad, and serve him so well, he becomes our most effective salesman, though he is not in our payroll. More importantly I have experienced that, whatever we give from the heart to a customer, – even whom we thought was bad- comes back to us with interest, appreciation and more- particularly in terms of intangible advantages.


JMWJMW
JMWJMW

true 'dat (as to the article)  What was A.G. Bell (AT&T)'s exit strategy?

AmKosh
AmKosh

I'm not saying I think this article is wrong, but I do think that the people, especially the founders and other big wigs, should have a succession plan.

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