Sometimes, leadership teams don’t figure it out. Sometimes, the market environment changes, funding is not raised in time, or the product-market fit achieved in the beginning does not scale. There are a host of reasons why companies sometimes fail and sometimes succeed. This chapter explores that sometimes narrow bridge between closing a company and getting to exit in Any Which Way Out; the lifecycle of a Zell Venture as a proxy of a life cycle in general in Predictably Unpredictable; and in what getting to exit really means for founders in Check Out Is at Noon. It also discusses the pain (and sometimes the relief) of closing the doors or leaving after acquisition in The End Is Also the Beginning.
Many times, the difference between an exit and a company closing is exceedingly narrow. Timing plays a critical role, and sometimes, so does luck. Sometimes, that difference is blurred by semantics, where an exit doesn’t really mean a meaningful financial outcome or even a return on investment. There are times this may mean no financial upside at all (except perhaps future promise in the form of shares in the acquiring company). Even when the return on investment is marginal or non-existent, there is value in an exit of that sort, whether for the founders who have an elegant way out and a narrative, for the employees that keep their jobs, or for the innovation that finds continuation and a home for further development. There are times when innovation is actually better served in this scenario, as the acquiring company can inject more resources into the development of the product and have a wider customer reach to enjoy the innovation.
No doubt an exit gets much more attention. Getting to an ‘exit’, or sale of the company in a private acquisition or through the public markets in an IPO (Initial Public Offering), is the entire goal of the exercise for some. I have not, however, met many successful entrepreneurs that were predominantly driven by that goal. Sure, it is often an ancillary goal that is always in the background, but most successful entrepreneurs have a broader vision in mind of the company they are building and the dream they are seeking to achieve.
We have been blessed with 5 IPOs (namely Somoto, Real, NextVision, Hippo and IronSource) and tens of exits.153 We have also supported a numerous number of founders in closing companies.
Predictably Unpredictable The lifecycle of a venture is fraught with ups, downs, twists, and turns. It's not just about the difficulty of raising funds and the rejections along the way, as the case studies highlight; there are highs and lows from as early as the ideation process all the way through a sale process. Many compare it to a roller coaster. But unlike a roller coaster,
there are some recurring patterns that can almost be predicted. Predictable unpredictability? Ichak Adizes translated the human lifecycle to the business world.
The lifecycle of a venture is fraught with ups, downs, twists, and turns. It's not just about the difficulty of raising funds and the rejections along the way, as the case studies highlight; there are highs and lows from as early as the ideation process all the way through a sale process. Many compare it to a roller coaster. But unlike a roller coaster, there are some recurring patterns that can almost be predicted. Predictable unpredictability? Ichak Adizes translated the human lifecycle to the business world.
At Zell, we took it a step further. With Dr. Amir Kfir, who studied under Professor Adizes and uses the Adizes methodology as well as his own developed methods for program workshops in team dynamics, we developed a Zell version of the life cycle.
The Zell life cycle starts after the Summer Induction Program (SIP), and follows a courtship phase where teams are built, and invariably, some hard choices are made. By definition, the small group of participants, which varies from year to year between 18 and 24, creates limited optionality for team building. Infancy in the Zell paradigm is characterized by the initial stages of ideation where some teams get off to a quick start, i.e. Roomer,154 whose team presented their idea for a hotel room reservation marketplace in November at the kickstart of the Zell 11 (2011 – 12) academic year.155 For others, the ideation phase drags on, causing frustration and eventually demotivation. Famously, Overwolf was created as an ideation process after a no-go of a previous idea in May, a month shy of the program’s end.
Whether the idea comes early or late in the year, eventually every team finds something to work on. At the semester break and the halfway point of the program, another threshold is crossed in the life cycle paradigm and that’s the founder’s trap, or Go-Go stage. Either the idea is not gaining traction but founders are weary of going back to the drawing board, the reality of some of the early assumptions does not pan out when data is collected, or team dynamics issues after months of working together create frustration and deadlock. All in all, this is a topsy-turvy time that leads some Zell students to wonder if this is the right team, the right venture, or the right timing for the startup world?
Nevertheless, the end of the program and the planned trip to the U.S., where there is an opportunity to present the venture to U.S. investors, including Sam Zell and the Equity Investment Group, is usually a strong pull to keep at it.156
In the Zell Program, the ‘adolescence’ stage comes at the end of the program, whether during the trip abroad, or in the COVID-19 reality of 2019-20 at the desert retreat called the Bridge.157
For Zell Ventures started in the program that survive this stage, the real ‘prime’ stage begins at the junction between the end of the program and the entry into the ‘real world‘, when they are no longer students and no longer coddled by the faculty and mentors of the program in the safe confines of the Zellerator, our beautiful own campus space.158 For some, the end of the program is a chance to regroup and start the cycle again. i.e. Karin Levi and Ofir Beigel
who left their teammates Tal Glass and Johann Dahan (all Zell 10 — 2011) and their internet radio venture to form Wheesh a couples messaging platform.
The cycles described in the previous chapter of fundraising and meeting the market continue until they don't. Some companies reach an exit in a short time, i.e. The Gifts Project, without a viable product in the market, i.e. Argus,159 or after many years and profitability, i.e. PicScout.
For Wibiya, they rode the lifecycle wave through a successful commercial ending, but nevertheless shy of making the impact they dreamed of.
The company was built and sold without a clear understanding of the exact problem they were solving, nor a profitable buisness model. It was acquired by Conduit160 in 2011 for $45 million dollars, and discontinued in 2013, without the business ever having turned a significant profit.
They were growing, but as founders deeply knowledgeable in their space, they realized that competition was growing and that the value proposition would not be achieved without a significant influx of marketing spend to be able to narrow in on the target market and nail product-market fit. After getting a lucrative acquisition offer, they signed on to stay at Conduit and grow Wibiya in-house there. Dror and Daniel were keen to prove the valuation was a good bet on the part of Conduit.
They also needed to convince their investors that the timing for the sale was right. This ties into an inherent conflict of interest between founders and investors. On the face of it, everyone wants success for the company, but defining success is not always that simple. For first-time entrepreneurs, even a modest take-home amount could mean a big step up in life financially and certainly from a professional level. The opportunity afforded by an exit could be both a badge of honor and a meaningful position in the acquiring company. As an example, Ron Gura was offered to create and run eBay’s first R&D center outside of the U.S. on the basis of The Gifts Project acquisition. That led to an impressive corporate career of several years as he rose in the ranks at eBay. Beyond the financial benefit, the wealth of knowledge on how corporate U.S. works and the exposure to large deals and professional team dynamics is priceless.
For Dror and Daniel, Wibiya was an incredible ride, beginning with a fledgling idea about internet search by vertical, and transforming into a powerful ad-tech tool and an exit. The pair started out working in a spare room at Daniel’s parents house, and ended up in the local corporate offices of a big ad-tech player, becoming domain experts in a field they initially had known nothing about.
But as many founders learn, an exit for the company does not necessarily mean an exit for founders. After a sale of a company, generally investors will cash out, but founders will often be enticed or locked in (as the case may be) by re-vesting agreements or earn-outs, or by lucrative salaries and by roles in the acquiring company, etc.161
After staying the course and running Wibiya within Conduit for several years, Dror and Daniel (and their third partner, Avi Smila) knew they wanted to finish the chapter and start another one, together. This took some time, an interesting twist in team formation, and idea development far from their domain expertise. [See the Lumen Case Study]
For Nimrod Bar-Levin, the road to an exit was longer. OnO Apps had grown organically as a revenue-generating business from day one. They only raised from one investor,162 and never grew beyond their capacity to cover the growth from their revenues. By the time they were acquired six years in with 30 employees and customers all over the world, they had received several acquisition offers for a company they had never intended to sell. For Nim and his partner, Orr, the impetus to sell was driven by an urge to grow exponentially and maximize the potential of what they felt OnO Apps could achieve under their management but with more significant resources.
This worked for a while, and not without adjustments to culture and growth under a new company management. In the end, differences in mentality and vision were quelled, but Nim grew to see the market opportunity as less lucrative than he had envisioned, plus, the entrepreneurial bug had begin to stir. Nim began to see the end of the road, but the path took on a new direction. Older, wiser, and emboldened with a desire to make a real impact, he and Orr empowered team leaders within OnO and Matrix (the acquirer), and set off to change the way education is experienced by kids and their parents with Dynamo. [See the OnO Apps Case Study]
The end does not always come without a sting. For Gal Aharon of Engie, the road after Zell was long and not without drama, but they had seemed to be on a roll. They had a strategic investment lined up and all was about to lead to a long-awaited crescendo. Then, COVID-19 hit. The strategic partner was a company based in Asia, so the effect of COVID-19 reverberated fast and hard. Within a few weeks, with parts of China effectively closing down, the deal, so long-awaited and so lucrative, was first postponed and then off the table all together. Having proceeded so far on the deal, its demise also meant that Engie was with its back against the wall in terms of alternatives. After several weeks of waiting and hoping, it became clear that some difficult decisions had to be made. Engie was closed, but out of the ashes and with scars to show the wear and tear and lessons learned, Gal and Alon Hendelman, her partner from Zell, are setting off on a new adventure.
