How To Sell Your Company Without A Buyer

Editor’s note: Eric Paley is a Managing partner at Founder Collective, a seed-stage venture capital fund that has invested in Uber, BuzzFeed and MakerBot.

Conventional wisdom is that startups are bought, not sold. The logic follows that no matter how much an entrepreneur wants to sell a company, there needs to be an eager buyer and no amount of seller desire can manufacture one. Some people interpret this wisdom to mean that they should spend no time getting to know buyers and when a large company is ready to buy their startup, they’ll come knocking.

I understand this advice, but had very different experience selling Brontes Technologies, a company I co-founded with Micah Rosenbloom that brought mass-customization to the dental industry. The process started without a buyer and ended with five.

Strategic Fundraising Can Test the M&A Market

We were starting the process of raising our Series B financing with a beta product and no revenues. Micah and I believed that we had a game-changing technology for dentists, but that the venture capital community would undervalue it, because we didn’t fit into an easily defined category, like enterprise software. No matter how much we tried to convince VCs that enabling mass customization in dentistry was a big economic opportunity, even the most excited investors would put a discount on a market that they didn’t know well.

Micah and I decided to seek out strategic financing for two reasons. First, we thought a strategic investor could help financial investors understand the potential value of the business. Second, I commented to Micah, and truly believed, that “if only we could get someone to fire a shot, there would be a war to buy the company.”

We had no specific intention to sell the company at that moment, but we saw eager acquirers as offering the company meaningful optionality on valuation, and we wanted to build momentum around potentially being purchased at some point.

Get to Know Potential Buyers Early and Often

We had invested time over the previous two years getting to know key industry players. The head of corporate development at each of the companies in dental tech had likely told their CEOs that they were staying close to Brontes and would get a look if we were interested in selling. I think this was one of the most important investments we made when it came to selling the company.

Companies may be bought in a moment, but they are sold over time.

These industry players knew us reasonably well. We weren’t calling them cold to offer them an opportunity to invest in a company that they never heard of. While we were somewhat coy with senior folks from the industry, we had done a good job creating a positive reputation as a team building something that could be important to the future of the industry.

When we approached three industry players to offer an opportunity to invest in our round, all three wanted to pursue diligence and ultimately all three offered to invest. While we weren’t certain we wanted strategic investment at the start, we became convinced over time that one of the strategies offered great upside of having an industry investor with minimal downside.

Incite a (Bidding) War

Coming to agreement with that strategic investor to lead our Series B was the shot that started the war. When we told the other two strategic candidates that we decided to take capital from a competitor, they were both very upset.

One flew up that same week to meet us for dinner to convince us not to take the deal. He looked me in the eye and said “what can we do to get you to walk away from the other deal and take money from us. We can definitely beat anyone on valuation.”

I responded “It isn’t about valuation. We are afraid that a strategic investment from you could hurt our opportunities to work with others in the future and are convinced this isn’t true of the investor that we’re accepting. Absent an offer to buy the company for more money than has ever been paid in this industry for a pre-revenue company, I don’t really think there are alternative ways for us to work together right now.”

They made an unprecedented offer to buy the company the following week.

Sell Without Selling Out

Getting to know all the big players in the industry over the past two years was paying off. So we took that first offer and immediately called the other potential buyers to tell them that we had an offer to sell and didn’t want to do so without speaking to them first. We’d need to know quickly whether they were serious about buying the company and what they could offer as a price.

Two weeks later, we had the war for the company that we imagined. Five buyers bid to purchase Brontes. While 3M wasn’t our first choice when the process started, they did an amazing job helping us see the potential to build Brontes on their platform. By the end of the process our management team was unanimously convinced that we wanted to be part of 3M and an offer for $95 million sealed the deal. The price war had driven up the value of the company nearly 50 percent from the first bid.

Could any of this have happened if no one in the industry thought what we were doing was important and potentially of interest for acquisition? Certainly not. Having said that, the process didn’t start with a buyer and it ended with many.

Selling a business is a process that is executed with a long view and years of preparation. It’s important to get to know buyers well before a company is interested in selling and build mutual respect over time.

Companies may be bought in a moment, but they are sold over time.