This is a Q&A with Dr. Basil Peters, the CEO of Strategic Exits corp, best-selling author of Early Exits and successful entrepreneur—he was the founder of Nexus engineering, now part of Cisco, that grew to over 300 employees on 5 continents.
Let’s start with a brief background. You were the CEO and founder of Nexus Engineering that is now part of Cisco. Tell us how you got into the venture capital business.
I started a venture capital fund because I had a successful exit. After being a starving grad student and then a starving entrepreneur, I suddenly had quite a bit of money and worried what to do with it.
Unfortunately, there had been dramatic changes in the industry that reduced the need for venture capitalists–99% of successful technology companies don’t need venture capital. This why I wrote the Early Exits book.
You say that 99% of tech companies don’t need venture capital. Could you expound on that?
In the 1980s and 1990s, it didn’t seem to matter much whether you were starting a hardware company or a software company. Every company seemed to need tens of millions of dollars of capital to scale up. This created the need for the traditional venture capital industry.
They aggregated capital from the largest sources and allocated it to companies on a portfolio basis. But over the last 10 years, the cost of creating new enterprises—whether in tech or life sciences–has decreased by thousands of times.
What would have cost a million dollars when I was starting out, you can now do for tens of thousands of dollars, so venture capitalists have become dinosaurs.
Let’s talk about your book best-selling book, Early Exits. Inc magazine selected it as one of the top 10 best books for entrepreneurs. What are Early Exits and why entrepreneurs should consider them?
Some might say that Early Exits is my portfolio management preference or that it’s a strategy for entrepreneurs and investors. I believe they are simply a macroeconomic reality driven by a couple of factors.
The first, which I mentioned, is the dramatic reduction in capital needed to build a valuable company.
The second is that we are living in a highly globalized economy that has resulted in a ‘smaller’ planet. This is wonderful in some respects because you can now go to Walmart and buy shoes for $20 or a t-shirt for $5. But it has also meant that, to survive, companies need to be very good at being very big and global.
Optimizing for scale has necessarily meant losing the ability to innovate, according to some brilliant research from the Harvard Business School and Thomas Wessel.
The third factor is the conservative management adopted by most companies post the financial crisis. American companies now have about twice as much cash on hand as they used to.
The CEOs of Cisco, Apple, Microsoft and other big companies have all had a difficult time at shareholder meetings because they have too much cash, yet readily admit they’ve lost the ability to innovate.
The business solution to these two problems is obvious: Acquire young entrepreneurial companies.
While there is nothing new about acquisitions, we’ve never quite seen as much interest in early stage ones. Big companies have learned that their best M&A strategy is to snap up companies much earlier than before. In fact, Google has stated that their sweet spot is $20 million with 20 employees.
If I’m an entrepreneur why is it a better strategy to sell early? (versus growing the company and realizing a bigger exit)
Well, if you are an entrepreneur hopefully your goal is to succeed. I say “hopefully” because sometimes entrepreneurs have different motivations. But let’s say you start out, build a team and bring on some investors. To succeed, part of the goal is to recognize what’s happening in the economy.
The economy, the market is bigger than all of us. You can’t change the reality in which you’re operating. Today’s reality is that the most likely path to success—and I mean 99 point something probability–is you’re going to have an exit in the $10 million to $50 million range.
The other strategy is to try and be a unicorn. To raise enormous amounts of capital and build the next Apple, Microsoft or Amazon. There’s nothing wrong with that. If that’s what you want to do and if you can find investors to finance it, that’s a perfectly legitimate strategy. But the chances of success are about the same as winning the lottery. It is a black swan event.
courtesy of LifeHacker
What I am trying to do is help entrepreneurs and investors understand that the dramatically higher probability of success is to do what the economy wants, which is to transition the business to an organization that has the capital and infrastructure to scale it up.
Smart entrepreneurs are realizing this, starting several companies and selling early. You can do 5 or 6 in a lifetime and become enormously wealthy. After the first success, you’ll have your own money to invest so you can avoid excess dilution and capture more of the upside.
You’ve said the exit is the best part of being an entrepreneur because that is when you realize the gains of all your hard work. Your company helps entrepreneurs attain optimal exits. How do you do this?
The investment banking industry has not awakened to this new reality of early exits. If you have a $100 million company to sell you’ll find 50 plus firms able and willing to help you. But good luck trying to find an M&A advisory firm that will facilitate a $20 to $30 million sale!
I realized this when trying to get exits for companies I invested in. As an investor, writing the check is the easy part. Getting your money out is much harder.
Fascinated by how bad we were at exiting the companies we built, I decided to build a service that would do this. I would estimate that about 75% of companies that could have successful exits don’t. The primary reason is a lack of knowledge and poor decision making around exits. This is a terrible shame and is just heartbreaking when we consider all the lost wealth and lost jobs.
Solving it is what gets me out of bed in the morning. My personal goal is to get the figure closer to 50% so we only blow it half the time instead of three quarters of the time.
You are both a successful entrepreneur and a successful investor. Which do you enjoy more and why?
Being the CEO of a high growth company is a lot of hard work. When I grew my company to 300 employees with offices in five North American cities, London, Hong Kong and Jakarta, many of the things I did everyday were no fun.
I realized my personal life goal was to have far fewer subordinates than I had, who would bring me the really hard problems solve every Monday morning.
Being an investor is 80% of the fun, but only about 10% of the hard work. So for me there’s no question, being an early stage investor is a lot more fun than running a high growth company.
While most would agree that having first been an entrepreneur makes you a better investor, I’ve also heard that investors who try to act like they’re still the entrepreneur are less successful. Do you have any insights on this, having been on both sides of the table?
Absolutely, and you’re right. It’s a difficult transition for most entrepreneurs I know who then become investors. And it was especially difficult for me since as a CEO, you are used to being in the driver’s seat.
There were times I couldn’t resist the urge to grab the steering wheel and change the direction of the bus. It took me a while but I think I now have the experience and wisdom to calibrate my level of involvement.
Do you have any advice for investors trying to make a similar transition?
Yes, join one or more high quality angel groups. At one point I was attending five different angel group meetings regularly.
If you were to pick one and only one single biggest factor that determines a startup success, what would it be and why? Some say it is product-market fit, others believe it is timing and the rest feel it is the team. What would be your one factor?
It is absolutely the team and really the leader of that team. The reason I believe it’s about the people is there are lots of examples in my career where the original product failed but the company succeeded. We’ve got a whole new word for it now: pivot.
And if you look at how many companies have pivoted and been successful, that’s kind of a proof that the critical, magic ingredient is the entrepreneur. The right individuals will build the right team and the right team will eventually find product-market fit.
Do you have any parting thoughts or advice for entrepreneurs?
We are living through a golden era for entrepreneurs. I don’t think there’s ever been a time in history where it was so easy to create such valuable companies on so little capital and sell them so early. If you think you might have it in you to be an entrepreneur, go for it. Find some peers at an accelerator or incubator and get to know some angel investors. It’s a wonderful time to be an entrepreneur.