Startups Are Bought Not Sold?
Chapter Eighteen Excerpt: Startup Muse available from Amazon
The old adage that “startups are bought, not sold” is widely held and yet I would argue it is an urban myth. While most entrepreneurs hope to take their companies public like Apple, Google, or Facebook — the reality is that most successful founders will eventually sell their startup to a strategic buyer. Investors know this fact and if they’re the least bit interested in your company they’ll ask you for a list of potential acquires. If you’re waiting around for your startup to be bought you’re going to leave a LOT of money on the table. Start selling now.
The other day I was sitting through a Series A fundraising pitch from a fairly successful SaaS startup when the founder began listing the potential strategic buyers. I asked the founder if he had talked to any of the buyers about a possible acquisition — he had not. The founder explained that he thought his company wasn’t far enough along to start those discussions and that he was concerned about the potential buyers becoming competitors before he was ready to sell. I couldn’t disagree more on both counts, but since there were other investors in the room I decided to bite my tongue and write this post instead.
The fact that your startup isn’t ready to be acquired isn’t a reasonable excuse to delay talking to potential strategic buyers. In fact, if you’re ready to sell it is too late to start meaningful discussions. Talking to potential buyers can help you understand how your startup will be valued and what features and strengths you should focus on — buyers are looking to your strengths to solve their weaknesses. Information is the coin of the realm and you need more capital — waiting until you think you’re ready is a huge mistake.
Once you begin marketing your Series A to serious investors who are actually interested in making an investment they’ve already reached out to your list of strategic buyers — like it or not you’re ‘now’ on their radar. Whatever stealth you thought you had is now blown by standard due diligence inquiries. The truth is that if you have a better mousetrap the buyer knew all about you long before your Series A fundraising effort. The fact that you’re selling stock in your company before understanding the acquisition market is a big mistake that could cost you and your early investors real money. Investors who decide to buy after talking to potential buyers are likely getting a discount as they have a LOT more information than you do. Before you sell a product you need to understand its value. My advice to founders is to reach out to potential buyers as soon as possible. Determine if they might be a buyer, what they’d want to see from your team before starting a conversation, and how much they might be willing to pay. Make it clear you’re not ready to sell, but that you’d love their advice. While there are a million ways to approach a strategic buyer, today I’m only going to share the “mentor method” — a simple and straightforward strategy that has worked well for me in the past.
Once you’ve created a shortlist of potential strategic buyers, identify a few executives at each company and determine who in your network can make an introduction, then get introduced — in most cases the best mentor won’t be the CEO as they are usually too busy. Once you’ve found a candidate, your goal is to share your story and ask the executive if they would be willing to mentor you. You’d be surprised how receptive most executives will be to your request.
Throughout the mentorship process you’ll be able to ascertain the buyer’s interest, needs, requirements, and pricing without much trouble. Hopefully, you’ll actually get valuable feedback and advice that is unrelated to a possible acquisition. When you’re ready to begin the M&A process you’ll be able to share competitive offers with your mentor and ask them for advice — and hopefully a counteroffer.
Your goal should be to engage mentors from at least two or three potential strategic buyers for your company — I would recommend you keep these mentors confidential from one another. Throughout the process you’ll likely learn that the companies you had hoped would buy your company aren’t interested or aren’t capable of completing an acquisition. The good news is that you’ll have engaged a few mentors AND determined who the real buyers are for your business. At the end of the day engaging with potential buyers early is the best way to secure lucrative investments, partnerships, and/or acquisition offers. Don’t wait around to get bought.