Your “Successful Exit” Might Be Harming Entrepreneurship

Another day, another announcement of a successful exit — terms not disclosed. Then a flurry of congratulatory messages. Then rumors that maybe the exit wasn’t as successful as people initially thought. It’s a pattern, and it’s not helpful to entrepreneurs.

Why does this happen?

No standard measure of “successful.” At its most generous, successful can just mean a deal got done. At the other end of the spectrum, some investors consider successful to mean a multiple of capital invested; enough to offset the losses of other portfolio holdings. Other investors might consider successful to mean invested capital plus an annualized return that exceeds that of a low-risk investment.

But at the very least, and at its simplest, success should return capital invested. I struggle to think of a situation where the goal includes losing capital.

Ego. Exits are public news. Successes are better than failures. Why go public with a failure when you can go public with a success?

Because failures matter. Track record is absolutely factored into the equation when you are being considered for investments. Future investors will want to find out about your failures, and that prospect encourages some entrepreneurs to spin a failure into a success. Bad idea. If investors have to peel back misleading statements to find your failures, your integrity is going to come into question.

Why is calling a failure a success a problem for entrepreneurship?

It misrepresents the real odds. I have written previously about the importance of assessing outcomes and probabilities. I think we’d have far more successful outcomes if entrepreneurs would capitalize their businesses according to what they think the business can become. When entrepreneurs see high odds of a big outcome, they take on investment, spend aggressively on growth, and swing for the fence. Miscalculation causes premature failure. When every attempt around you seems to result in a successful exit, you’re prone to miscalculation.

Calling your failure a success distorts the view for other entrepreneurs, and could cause problems with future endeavors. Own the L and move on.