What’s Your Endgame?

Illustration by Paul Blow

Turning 61 isn't the only reason I am starting a regular column called "Endgame" on PROFITguide.com. Everyone in business needs an endgame, whether they're starting their first paper route or turning their first $1 billion in sales. The endgame is a purpose. An entrepreneur without one is someone not truly engaged in building their business. He or she is only making a living—maybe.

There are many endgames to choose from, but all can be classified as one of two basic types: tactical or philosophical. Each has its time and place.

To illustrate, let's look at my last two startups. The first was in the 1990s, and the endgame was a purely tactical exit plan for investors—the very thing needed to attract them. The second is my current company, Inbox Marketer, which we deliberately have bootstrapped so we would have the latitude to make the endgame as philosophical as we wish.

Tactical endgame: Startup No. 1

In the mid-1990s, I got involved with a U.S. startup that wanted to revolutionize the government contracting industry by being the first to introduce digital services. A few angel investors already had bought into this startup's phone book-sized business plan, which called for a national rollout of centres at which contractors could analyze construction projects up for tender, estimate their costs and prepare bids. The plan would streamline what they had been doing with paper blueprints for generations.

We didn't exactly get to retire to our yachts, but we made a clean exit with enough capital to move on

The plan called for lots of bricks and mortar, which also meant raising lots of money. But neither the business plan nor management's resumés inspired the necessary investor confidence. I agreed to write a new plan that scaled down the scope of the business to a more manageable, online subscription service—made possible by the then-emerging Internet. When this new plan generated more favourable investor response, I signed on as CEO.

The business plan developed a compelling growth strategy for the company, but the exit strategy for would-be investors was implicit in every line. That strategy was to build a large, recurring subscriber base over the course of five years, then sell to a larger competitor. We developed a rational revenue model and extrapolated five years of growth and EBITDA based on what we considered to be reasonable assumptions. We also analyzed previous deals and their valuations to help build our case for how lucrative the exit could be. But no matter how conservative your assumptions or how careful your research, five-year projections are pure fantasy. You might as well predict five years of weather.

The new investors we attracted were a "hobby" group of wealthy individuals looking for action in early-stage technology companies. Wildly successful in their respective bricks-and-mortar businesses, they brought much practical experience to the table. But technology was unknown territory to them, and it sorely lacked the predictability (to say nothing of the tangibility) of their other businesses.

As things turned out, the subscription service grew more slowly than projected, which made for some heated board meetings in the first couple of years. But by aggregating more content than other providers and providing better value, we became the go-to service that a larger company could easily integrate into its operations. One of these—a Nasdaq high flyer—eventually bought us just a few months before the dot-com bust of 2000. We didn't get to retire to our yachts afterward, but we did bring the ship in and made a clean exit with enough capital to move on.

Philosophical endgame: Startup No. 2

Looking back at that first startup, it reminds me a bit of high school—a necessary, if not always gratifying experience that gets you into university. In your second startup, there's often more latitude to choose what you really want and ignore the rest.

In Startup No. 2, I chose to ignore outside shareholders. This time, with Inbox Marketer, a digital direct-messaging company, we had the money and experience to focus on the long term at all costs— which meant zero room for outside agendas focused on shorter-term returns. It also meant not taking financing and often covering payroll with personal cheques. But from Day 1, our endgame was to build an excellent company and let the exit eventually take care of itself.

Excellence for us meant building a corporate culture around serving a very specific customer. The customer we chose in 2002 was the corporate marketing manager. The problem we addressed was the painful transition these managers were making to an important new digital channel: email. These pros had direct-mail backgrounds and knew their way around marketing lists and response rates, but email presented delivery and optimization challenges. The other companies providing email marketing solutions understood the technology but didn't understand marketing. They built self-serve email platforms and handed their customers the keys with little more than a product manual. We identified a screaming need for email-campaign consulting that would help marketers use this new medium effectively.

Most great turnarounds in corporate history involved wrenching a company out of tactical mode

To meet that need, my co-founder and I licensed one of the email platforms and— with two employees—researched every aspect of this emerging industry and its best practices. Then, we rigorously applied those practices and bent over backwards for customers. In the first year, we broke even; in the second, we earned a nominal profit of $30,000; and in the third year we made a slightly healthier one. Where we did see real growth from year to year was in our business reputation. By the fourth year, we landed our first Fortune 500 account and that's when all the short-term pain for long-term gain really paid off. In 10 years, annual sales grew from $250,000 to $5.6 million. Most of the growth in our business today still comes by customer referral.

The most important lesson I learned was never to be too tactical when starting a business; you must stand for something.

Most of the great turnarounds in corporate history involved wrenching a company out of tactical mode and infusing a new philosophical endgame. Lou Gerstner's rescue of IBM in the 1990s remains the classic example: that took nothing less than reimagining a computer-hardware company that had grown arrogant and complacent into an IT services company committed to delivering total customer solutions.

Too many companies manage to short term optics rather than to long-term value, and much of this stems from the rush to raise capital too early or maximize short term returns. A business can easily get saddled with investors and creditors that management feels obligated to please and impress on a quarterly basis. But only the customer truly matters. Keep that in mind, and the endgame will take care of itself.

Randall Litchfield was the editor of Profit from 1986 to 1990 and has been an entrepreneur ever since. He is most recently co-founder of Inbox Marketer, an email marketing services firm and four-time member of the Profit 200.