Startup founders have a million things to worry about every day.
Finding product-market fit, great talent and and a sustainable plan for constant growth are top of mind, but perhaps most importantly, they need to keep the lights on, whether it’s by raising venture capital or managing cash flows while bootstrapping.
The flip side to thinking about fundraising and growth, however, is skipping ahead to the final chapter — whether that involves M&A, an IPO or perhaps a bankruptcy, eventually all startups come to an end.
Instead of thinking about an exit while in the final throes, founders need to strategically lay the groundwork, even if it is potentially years away. Here’s how.
On the Extra Crunch stage at TechCrunch Disrupt SF, we had a deep conversation on what founders should do to prepare for an exit with Jess Lee of Sequoia, who sold her startup Polyvore to TechCrunch parent company Yahoo; Justin Kan, who sold Twitch to Amazon and now runs legal startup Atrium; and Mike Marquez, the founding managing director of boutique investment bank Code Advisors.
The good news is that the primary requirement for exiting a startup is really the same work that a founder has to focus on: building a great business. “The best way to sell your company is to actually build a good company,” said Kan, since no acquirer is looking to buy damaged goods.
But even if you are building a solid business, that’s not nearly enough to get a transaction done some time down the line. One consistent piece of advice from the group was that founders should be thinking about an exit much more regularly, even if they are steadfastly opposed to one. That means identifying key relationships that will make an M&A possible and working to build and maintain those relationships.
“I thought about it too late,” Lee said about her time running Polyvore. “The same way you build relationships with investors, you should spend at least a little bit of time building relationships with partners who could become potential acquirers.”
Kan elaborated further. “I think that in the beginning, your responsibilities as a founder is just to find product-market fit [and] work on your product,” he said. “And then once you have a product that people want, you want to figure out how to get it in the hands of more people, and that’s when it starts to become really valuable to know everyone in your market and then adjacent markets.”
Far from being a completely separate task from the other duties of being a CEO, connecting with potential acquirers often has benefits for growing a company in the first place.
“…at a certain point in your company, it’s your responsibility to actually be out there talking to all the people who could be strategic partners for you, or distributors,” said Kan, “or wherever there’s some sort of a creative partnership, and those are generally the people who are going to turn into an acquisition.”
Marquez noted that founders want to maximize company value, which requires building deeper relationships with potential acquirers than what is possible in a final exit process. “The only way they are going to be willing to pay the best price is if you took the time to get to know them,” he said.
It’s hard to get a deal done at arm’s length over a couple of weeks of due diligence. “While it is a transaction between two companies, it’s a transaction between two people, and people care about buying a team, and the people that run a particular company, and it is important to not have that relationship be completely cold at the moment when you need to have a transaction,” Lee said.
Founders must be able to build relationships, but artful acquisition conversations require a special skill set. As I said earlier, founders should convey that they have a strong business with strategic value, but they need to be somewhat coy about their desire for a potential exit. Kan explained that in the early days of Justin.tv, “I had the opposite experience of Jess, we thought about exiting too much, we were very desperate and thirsty, and we really wanted to sell the company at a certain point three to four years in.” Desperation, though, is not going to be attractive to any corporate development head.
Marquez doubled down on being careful about sending the right signals in initial meetings with partners and potential acquirers. “This isn’t put a ‘For Sale’ sign up on the company when you are a month old and actively shop the company. [But] you do have to be known to these acquirers in order to be bought.”
In meetings with corpdev then, focus on the value you can create together — but as separate entities. Maybe your startup’s product could be integrated into a potential acquirer’s product, generating value for both parties. Perhaps you have missing features in each others’ products but similar customer bases, and so you could potentially cross-sale. Latent behind those synergy conversations is the logic for an acquisition, and no corpdev manager is going to miss those hints.
While investment bankers like Marquez are obviously most focused on the work to actually close transactions for clients, they also help startups begin to think about which relationships they should build much earlier on. Just as you acquaint yourself with acquirers, consider if there are bankers you should get to know in your industry who could prove useful in the future.
Beyond building relationships, one of the biggest questions for founders is timing their exit. Building a company as new deals get signed and other customers churn is a constant emotional roller-coaster ride, and you don’t want to sell your company as a response to a string of negative events.
Kan emphasized finding clarity before seeking an exit. “You really want to put yourself in the headspace where you can make a rational decision,” he said. “With a lot of founders that I advise, they’re burned out, they’re tired, and they want to do something different. And so they think, ‘I’m going to sell my company and everything will be better then.’ And I think the actual answer for founders is really to try to create an equilibrium in there, since you don’t really control when an outcome is going to happen at any given time.”
Sometimes, the founder burns out and needs to find a path forward. Other times, a market can change and that necessitates an exit as well. For Polyvore, it had found a successful business on desktop, but the rise of mobile happened rapidly and clouded its future.
“We tried multiple things, and it hadn’t yet been clicking. And so I was like, ‘Alright, we are back to the early-seed, product-market fit hunting stage in mobile for our business,’ and that, I know from experience, could take anywhere from one to four years,” Lee said.
She asked herself a number of questions. “Do I have the energy to do that? And does this team have the energy to do that? And are we willing to take the risk of continuing to go on in this state? As I was thinking through that, honestly, two acquirers reached out in the same week, and I was like, ‘Maybe this is a sign.’” Ultimately, her guiding principle after building out Polyvore for seven years was, “What do I owe the team?”
In short then, the key lessons for prepping for an exit are to constantly hone your network of relationships with strategic partners (who will often turn out to be your top choices for acquirers) and to never send a signal of desperation regarding an exit. Meanwhile, the timing for an exit will often become clearer as it happens, particularly if you are balancing your clarity about how your startup is performing.
For the whole interview with Kan, Lee, and Marquez, watch the video from Disrupt.