For outsiders the startup landscape looks like a group of companies just waiting to be acquired. This investment-heavy, press-heavy, fake-it-till-you-make-it industry is full of big money buys and members of the three comma club. It's not a case of if...but when.
The reality is that a tiny percentage of startups are acquired for big money. Big, life-changing amounts are rare.
The best case for most founders is an exit that gives them some capital and experience. That's not a bad best case.
There are two types of startups
Startups that are hot already have acquisitive eyes on them, and will likely have had some discrete conversations already about a potential acquisition. As they're hot and growing fast there's little interest in selling out. Incumbents in their sector will be watching them closely, other startups will be trying to replicate them.
The rest of the startups - and the not-hot startups account for a significant percentage of all startups - are likely doing things that are just as interesting as hot statups. They probably have a good team, and they could be well funded, but for whatever reason they're not setting their numbers on fire and may not have product market fit. If you're in the not-hot category then you're not alone.
Being hot today does not mean you're hot next year. What's more interesting is the not-hot startups that grind away, find PMF and then become hot.
There are two types of sales process
- The startup has money, the exit could be big, so a professional M&A team is built around the founders
- No money. The founders run the exit process from end-to-end. It's most-likely their first rodeo.
The first comes at a cost: monthly retainers, a percentage of the deal, but gives access to great talent who will work to get this thing closed. They know how to run a deal process and they add on so much value. Hopefully more value than their fees.
When founders run a sales process they will make smart, educated guesses. Their board may give useful advice. They may have friends who have been through a similar process. It's wind-in-the-hair stuff, where mistakes happen but experience is gained. Blogs and books will be read. It's rough and ready...but it can work. And the buyer gets to see and feel the business from the very first call.
For most startups the decision on whether to bring in M&A support is based on cost and cash. Going it alone is the cheaper option, and whilst the M&A experts will tell you that they will get you better potential buyers and a higher price, you just can't afford that.
Why startup founders want to sell
The majority of startups want to sell because of cashflow or funding issues.
The reality of running a startup is it's often unprofitable and is usually reliant on investors returning for a future round. Sometimes that door closes, and reality bites: it's sell up or shut down.
The long tail of reasons why a startup wants to find a buyer is more interesting; some startups recognise that being part of a larger organisation would lead to 1+1=3. Some startups experience challenges that would be solved with scale. Sometimes a founding team wants to split, and sometimes that's for non-negative reasons. There are countless other scenarios for startups looking for an acquisition, and they're as complex as the humans that create them. Complexity, or strange reasons, for a startup wanting to sell does not always equal bad.
Most startups never get a single good acquisition offer, ever.
Jason Lemkin, Saastr
Are there startups that can't be sold?
There's a buyer for every business, but the reality is that for some startups the time it would take to find that buyer would be too long.
Startups that are very early stage and have no market traction are more difficult to sell. Startups that exist in verticals that are congested, and the startup feels - at this stage - to be a me-too business, are hard to sell. Startups built on other peoples technologies, that have no moat or IP, are also difficult to sell. During the pre-sales process it's important that acquirers dig into a business to understand what is unique about it, and sometimes that takes a very deep dive. For some startups the most valuable asset is the people within it.
Why it's hard to sell a startup
It's important to consider the negatives in any key strategic decision. My thoughts on the difficulty of selling a startup are based on the belief that the more you know, the better things will go, and I don't intend to make an exit appear an insurmountable challenge.
Selling most businesses is hard; the process can take months or years, it requires both the seller and the buyer to be at the right point where an acquisition makes sense, and until the deal is closed it runs the risk of being affected by external factors. The economy may change, the seller or buyer may reconsider their options, or the management at either company could change.
Either business, or even both, could go out of business before a deal is closed.
There will be those on the buy-side who are bought in and who see an acquisition as being valuable, but for every proponent there will be a detractor. If selling a business is complex, then it becomes even more difficult when people within a buyer are working against the purchase.
That this goes against the best interests of the buying company will not stop a CTO whispering to the CEO that a startups technology would be too difficult to integrate, and they could just build it themselves. If the buyer is based in an area of cheap labour that can stop a deal in it's tracks. "Give me a 20% of the cash you set aside for the startup, and one year, and we'll have built a better version". Yes it's risky, but is buying your startup less risky?
Selling a startup can be more difficult because it's harder for a buyer to see value in a business, and difficult for a seller to know what the hot button is. You may focus a buyer on your great product team, but unknowingly what they're really interested in is finding a solution to a development gap. If it's your first sale then you'll learn this along the way, but Buyers are also wary of losing the founding team, who are likely the drivers within the business and the most knowledgable.
Finding potential buyers is difficult. If your ideal buyer is another startup, they might be locked down as they prepare for an IPO. They may be running short on cash. Maybe things are more difficult for them than it is for you.
Here's my top five reasons why it's tough:
- 1. You have limited time to find an acquirer (Cash is running out, you can't sit around waiting for buyers to cycle back in)
- 2. You're a long way from profitability (Some acquirers aren't comfortable with buying losses)
- 3. Your valuation is tied to the funding that you've taken (You/board/investors are pricing out acquirers)
- 4. You have no acquisition experience (Mistakes are made, hopefully with the tail end of your acquisition target list
- 5. You can't create momentum (It's hard to get more than one offer, so you can't encourage speed)
Why bother selling a low-value startup
Cash from an exit seems like the most exciting part. But there's more. What if an exit led to employment in an interesting business? Or if just meant that you could continue building your solution but with the shackles taking off. Even if an exit just gives you a good line on your LinkedIn, it's better than a business going under.
If you exit your startup with no cash, but with experience of a true end-to-end business journey that's bankable.
