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Reflection – Lokesh Ramani

by on November 29, 2007

IMT 581 –Reflection 5
Author: Lokesh Ramani (lokeshr@u.washington.edu)

Exit Strategy: Is it wise to formulate your end game too soon?

With the advent of emerging online technologies, web 2.0 standards, the market has witnessed a surge in the number of new ventures and businesses, offering services to a wide range of customers. As an entrepreneurial unit, I understand that it is pertinent to devise an exit strategy plan for venture capitalists and investors to gauge the big picture of such a potential investment. Due to such a dependency, I wonder if entrepreneurs underestimate the potential of their ventures and settle for a less effective and profitable exit strategy option. I thought it may be pertinent to combine some concepts from the previous class “Management of Information Organizations” taught by Prof. DeSouza and discuss about exit strategy in entrepreneurial ventures and their implications.

In a dynamic environment with fluctuating market trends and influx of cutting edge new technologies and ideas, it is my opinion that to define an exit strategy at the very start of an entrepreneurial venture may not be an effective and efficient decision.

We are in the era of Agility- agility in thinking, agility in actions, agility in adaptation and agility in decision-making. Planning for an exit strategy at the start of a business venture contradicts the concept of agile management organizations, where “Emergence” replaces the concept of planning. Specifically, in rapidly changing business environments, scoping out an early exit strategy may lead to two consequences

Closing a successful business venture too early without perceiving potential high monetary rewards due to dynamic market trends
Prolonging a successful business venture to a potential failure without perceiving damaging market trends due to a rigidly defined exit strategy

I strongly believe that the goals set for an organization should be short-term and highly adaptable in reaction to internal and external forces that affect business. Specifying an exit strategy translates to the setting of ‘that’ end goal which signifies an entrepreneur’s exit from one’s venture. This end goal when set during the initial phase of a business start-up may have no relevance in the passage of time. This is an analogy to Prof. DeSouza’s perception of the effectiveness of long term planning like Five Year Plans etc.

It would be appropriate to quote this following as an example for an inefficient exit strategy. Sabeer Bhatia founded “Hotmail” – the first web based email service in the world. Armed with a completely new business model, Hotmail decided to offer its services for free and earned revenues entirely through advertisements. One year after its genesis, with more than 7 million subscribers, Sabeer Bhatia shaped his exit strategy in the form of selling “Hotmail” to Microsoft for $400 million. “Hotmail” marked Microsoft’s single most important pathway into the dot com industry; from where it still obtains a sizeable part of its revenue. Sabeer Bhatia started another entrepreneurial venture called Arzoo.com two years after selling Hotmail. It had to be shut down after the dot com burst. The reasons why this could have been an inefficient exit strategy may be due to the following
The inability to understand the emergence of Web based email services as a highly profitable business venture
The inability to think “Big” and settling down for modest goals
The inability to fight the lack of intrinsic intellectual and business capabilities of the business venture by hiring highly competent individuals to the organization.
Lack of clear direction about potential business opportunities and potential.

The concept of “React rather than Predict” may be relevant to the formulation of goals corresponding to exit strategies in current agile business environments. It is important to acknowledge that human needs and goals also dynamically vary according to changes in the environment from personal, professional and business perspectives.

Another interesting example is the case of India’s biggest IT organization – Infosys. Infosys was started in 1981 as a Software solutions provider by a group of 6 individuals. Within a few years of its existence, Infosys was offered a takeover deal from a bigger US based organization for a few millions dollars. This deal was considered highly lucrative by 5 of the founders and they were ready to accept the deal. However one of the founders -Mr.Narayanamurthy was completely against this exit strategy. Consequently this deal was stalked off much to the disappointment of the other five founders. If this modest exit strategy had been implemented, India wouldn’t have witnessed a company that provides 66,000 jobs, with revenue of $ 2.15 billion.

My argument is that, more often than not, exit strategies formulated during the genesis of business ventures tend to be a modest evaluation of one’s own capabilities and resources. Evaluation of intrinsic capabilities, resource, market opportunities should drive the need for exit strategy at any point of the functioning of a business. In current business environments, short term plans and fast results shape the agile functioning of organizations. Similarly, emergence and agility should be practiced in knowing when to call the end game.

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