It's useful to think of an exit strategy as answering the question, "What would I accept to let go of this product?" Generally it's a check for millions of dollars for an inventor or entrepreneur, or accolades and a promotion for a program manager. Or it can be more humanitarian, like eliminating trash to reduce disease for millions of people. Knowing what you want to accomplish provides a solid foundation for all your product development efforts.
There are two key paths that all product development efforts should follow – and at the same time:
1. generating revenue and market share and 2. selling the idea.
These two concepts are tied together and are what brings value to new product initiatives.
1. Generating Revenue and Market Share
Ultimately, the value of your idea is in how much cash flow it can generate, now and in the future.
It takes time and money to create a product, generate market share and gain a loyal following. These are called "fixed" costs and are generally considered an investment in a long-term asset. Manufacturing a product costs a certain amount of money, say $1 per piece. This is called "variable" costs.
Say you sell your product for $2 each. The revenue generated by sales of your product offset the costs. Ideally, the difference between the revenue and the costs is positive at some point in the future.
At a minimum, the revenue must exceed the variable costs to create value. This value can be projected into the future. However, the future is hard to predict, so a number is assigned to that risk. The risk associated with the project is defined as a rate of return an investor requires in the form of a percentage.
These are the general principles behind Time Value of Money calculations. This is how, for instance, large and unprofitable start-ups can be valued at billions of dollars. Sure, they need more money to put systems in place, but each sale might be very profitable. At some point, the systems will be set up, risks will be eliminated and the fixed costs will be greatly reduced, allowing the cash flow to be positive. Herein lies the value.
There are many textbooks and expert resources available to learn more about the time value of money. And every investor is going to have a different idea of the required rate of return. Knowing the potential value of the idea helps inform how much the effort is worth.
2. Selling the Idea
Always be open to selling your idea. Always be open to selling your idea. It cannot be said often enough. Always be open to selling your idea.
By knowing your market, the potential cash flow of your product and the risks associated with the unknown, you can have a pretty good idea of your product's value. A gut instinct can also work.
As you invest in your idea and in generating revenue and market share, the value of your idea will become more certain. If you are an inventor, this is the basis of your approach. As an entrepreneur, it allows a lump-sum payment to "cash-out" and enjoy doing something else. As a program manager, it allows you to know the value the product can generate for the company you work for, and helps you make better and more informed budgeting and resource allocation decisions.