As I interviewed dozens of exited founders, many of whom sold for $100s of millions, I noticed a pattern: none had an exit strategy that included the company that actually bought them. In fact, none of them really had an exit strategy at all. At least not one that they took seriously.
If planning for acquisition doesn’t work, why do over 50% of founders expect to get acquired?
An exit strategy isn’t really a strategy
A strategy involves a plan and its execution. It assumes significant control over the outcome.
Unfortunately for startups, an exit requires a mind-boggling combination of the right internal and external factors, many of which are outside your control.
First of all, an acquisition requires a buyer, and no amount of desire to sell can manufacture one. Even with a potential buyer in place, they need to make an offer that you’re willing to accept, at a time when you’re ready to sell.
But as you’ve probably heard, companies are bought, not sold. In other words, the buyer decides who they want to buy, when they’re ready, and how much they’re willing to pay — and there’s only so much that you can influence.
“I think there’s a lot of founders who believe that they’ll just be able to sell their company when they want to. In reality, this is not how it works. It’s very rare that an acquirer comes along who wants to buy your company for as much as you’re willing to sell it for.” —Sean Byrnes, founded and sold Flurry to Yahoo for $250 million
If exit strategies are not effective, why do many investors expect them from founders?
Investors look at an exit “strategy” like they do at financial “projections”
Neither is meant to be taken very seriously or is expected to be accurate, but it’s important that the founder is thinking about both, and investors want to know that. VC firms are not charities. They expect returns on their investments, which requires two things:
- An increase in price per share (and in effect, company valuation)
- A liquidity event (aka an exit), where shares are sold for cash
So regardless of how much a company grew, an exit must happen for investors to realize their return. “[LPs] can’t spend unrealized gains,” points out Scott Kupor of Andreessen Horowitz, “The only thing that matters in this business are actual, realized, and distributed returns to LPs.”
If VCs only invest in startups with the goal of them eventually exiting, it seems like a more appropriate term should be exit potential, not strategy. Investors want to make sure that founders are working on ideas that have the potential of scale and liquidity but are also well aware that having strict plans for both is unrealistic, especially early on.
If planning for an exit is not meant to be taken seriously, what can startups do to get bought?
Getting acquired is like getting married — it starts off as a relationship
Out of ~50 exited founders that I’ve surveyed, 72% had a relationship with the buyer prior to the acquisition.
The great thing about relationships is that they can be pursued and built deliberately. So although you can’t plan for an acquisition with a high degree of certainty, you can optimize for one by building relationships that often precede it.
Forming such relationships should not be a major focus for founders, but it should be somewhere on their agenda. The “Build it and they will come” approach doesn’t work for acquiring customers, nor does it seem to be particularly effective for getting acquired.
“As a founder, it’s good to stay close [with potential acquirers]. Even if you’re years away from where you think you want to exit, you really would be doing yourself a disservice if you didn’t always know the market for the main asset that you control— your company.” —Chris Barton, founded and sold Shazam to Apple for $400 million
Besides forming relationships with potential buyers, what else can founders do?
Leverage, leverage, leverage
Not all exits are created equal.
In fact, most are much smaller than you probably think (70% are less than $15 million and only 10% are over $100 million), and many are mediocre financial outcomes for founders.
While having the right relationships increases your chances of getting acquired, leverage determines whether it’s a bad sale or a good one. Although any acquisition is better PR than bankruptcy, the financial outcome of bankruptcy is the same for founders as a bad acquisition — neither leads to a payout.
So how do you build leverage?
Never be desperate to sell
“The thing that makes the conversation entirely different in M&A context is whether the founder has leverage or not. The best possible place you can be as a founder approaching an M&A conversation is when your company is growing and is profitable (or close to it). ” —Armando Biondi, founded and sold AdEspresso to Hootsuite
Similarly, Justin Kan, who started and sold Twitch for $1 billion to Amazon, explains that “If you’re running out of money, your company hasn’t been growing, and you’re desperate to sell it, then you don’t have any leverage.” Essentially, leverage comes from having optionality, which is the opposite of desperation. Having optionality allows you to take an acquisition offer at your own terms—when both the price and timing is right.
“Acquisition as an exit option is not a panacea. It’s not a release valve, it’s not an escape pod, and it’s not a fallback. This is the most common misconception of building toward acquisition. It shouldn’t be the final option; it should be the third option, with the public markets and a lifestyle business being the other two.” —Joe Procopio, who founded and sold Automated Insights for $80 million to Vista
Optionality, and in effect leverage, comes as a natural by-product of building a great company. So as paradoxical as it may sound, the key to optimizing for a successful exit is not to focus on the exit at all, but on building a great company.
“The best strategy, in fact, your only strategy, is to focus on building a successful and highly profitable business. As long as you do that, you will control your own destiny and decide if and when you get acquired on terms you decide.” —-Sean Byrnes (sold Flurry to Yahoo for $250 million).
Lastly, don’t forget to get lucky
Unfortunately for Silicon Valley, you can’t hack luck.
Even with all the right ingredients in place—a successful business, relationships with potential acquirers, and all fingers crossed—a successful exit may just never happen. So if you still insist on having an exit strategy, make sure to include “must get lucky” as one of the key steps.
Andrew Vasylyk is the host of the Startup Exits Podcast.