How to sell your startup

As a VC, I have a simple motive for investing: get out for way more than I paid. My fund only makes money when we sell our companies. So, it’s all about exits.

You will often hear that the best companies are bought not sold. That’s bullshit. Do customers just show up and buy your product? Do key management hires just show up and ask for a job? Do investors just show up and offer to give you money?

Barring luck and timing (which are a key part of all great exits) every outcome requires proactive efforts and strategies.

When it comes to proactively generating exits, Basil Peters is the thought leader with his book ‘Early Exits‘. FounderFuel mentor Randy Smerik also does some great investing and advisory work around this strategy.

At Real, we are small enough and invest early enough that we are good with early exits but much prefer to hold on to the rocket ships.

I like to do at least an annual review of exit strategy at the early stage moving to semi annual or quarterly as things take off and a company is on its way to being a market leader.

I often find that founders struggle with how to generate exit partners. Here is how I have seen companies successfully generate exits:

Build relationships: build a relationship with buyers long before you want to sell your company. I recommend startups meet or speak quarterly with the biz dev and corp dev folks at all key potential strategic partners. The goal is not to say you’re for sale. You’re just keeping them up to date and sharing your progress. These discussions tend to be one way at the start. But over time as you progress and become credible in their eyes, they will start opening up their organization to you.

Make money for your partners: if you sell something that makes an acquirers’ customers happy and hopefully makes the acquirer’s product more valuable to its customers that will get noticed. Back before freemium and self serve customer acquisition, my companies would proactively build joint customer wins with key partners.

This approach is tactical grunt work in the field but it works. Eventually news of these happy customers bubbles up to the right folks inside potential acquirers.

Grow like a weed: self evident and easier said than done but traction matters. If your growth proves threatening to a potential acquirer they will likely want to buy you. Facebook’s purchase of Instagram is a perfect illustration of this.

Build a killer tech team: great technical talent is scarce and the big giants are outdoing each other trying to attract talent. Before startups build premium valuations from their traction, their value to buyers is very much driven by the tech team. These modest acqui-hires are often explicitly valued as a bounty per engineering head.

To be clear, acqui-hires are not an intended outcome for an investor but they do represent great downside protection if things don’t work out as planned and we need to head for the exits.

Get the right VCs: there are mixed views out there on the value of VCs. At the Quebec City Unconference we co-hosted last month, Dave McClure said that VCs add as much value as mortgage loan processors. That’s Dave being Dave in my books. The hardest working VC in show biz.

There are plenty of VCs that add no apparent value but the right ones make all the difference. The secret handshake, back door access that these VCs have can make or break an exit strategy. There’s a reason why Sequoia has sold so many companies to Google (they were a big investor in Google).

I goto Boston and NYC regularly and more often than not the VCs I know there are coming to or just returning from the Valley. They are proactively building corporate development relationships on behalf of their companies. You want that in your corner.

I’m probably missing some great tactics but if you follow these you’ll be doing a lot to get your company bought when the time is right.

  • Marc faucher

    Simple and right on point Mark.

  • http://twitter.com/evo_thinker Abbas Sarraf

    “I goto Boston and NYC,” Your goto took me back in time, when programming GWBasic!

  • http://www.francis-moran.com Francis Moran

    Dare I suggest that much of what you’re talking about when you say that “every outcome requires proactive efforts and strategies” is the application of fundamental marketing principles to this function? The circumstances of selling companies, as opposed to hoping they’ll be bought (and hope is not a strategy), might be unique but the application of marketing principles is as common here as anywhere else.

    • http://startupcfo.ca/ Mark MacLeod

      not sure I understand your distinction between selling and marketing in this specific example

      • http://www.francis-moran.com Francis Moran

        Before it’s time to sell your company, you are carefully marketing it. In the first instance, you do this by identifying potential acquirers (customers, in pure marketing terms), building relationships with them and creating value for them even before they acquire. In the second instance, you are making sure you are building the right product — that is, a company that will be attractive for acquisition because it has strong traction and a killer team. Like I said, this is the application of everyday marketing principles to the unique circumstance of selling companies.

        • http://startupcfo.ca/ Mark MacLeod

          all valid, but at the risk of quibbling over semantics this quickly moves beyond marketing to sales/ biz dev

  • http://twitter.com/JPRichards1 JP Richards

    “As a VC, I have a simple motive for investing: get out for way more than I paid.”

    WOW Mark, right from the VC mouth. Grin. I affirm your authenticity. As an entrepreneur, who’s debated the VC thing, it’s the selling of my company which I don’t want to do necessarily. I’d rather look at possible private equity deal at some point, but not selling – out.

    • http://startupcfo.ca/ Mark MacLeod

      If you plan on keeping your business and not selling out, don’t take VC$. We only make money when you sell. <10% of exits are from IPOs. And a tiny fraction are from buyouts.

      BTW, checking out metta meals. I eat veggie most of the time (realize that's like being a little bit pregnant).

      • http://twitter.com/JPRichards1 JP Richards

        Thank you Mark for the reply.

        “If you plan on keeping your business and not selling out, don’t take VC$.”
        Again, further solidifies my belief in no VC$ for me.

        “BTW, checking out metta meals. I eat veggie most of the time (realize that’s like being a little bit pregnant).”
        So you’re plant-based, eh? Wonderful. I’ll help get ya full veggie prego – too far? grin – with a free annual MettaMeals.com subscription when we relaunch Dec 14.
        I like the “plant-strong, not plant perfect” mindset. A lot of the research (The China Study) shows that eating 90% plant-based and you can reap the health benefits of a plant-based diet. For me, it’s about letting of rigidity and perfectionism, and joyfully eating – and living.

    • http://davidcrow.ca/ davidcrow

      Don’t think that P/E changes the expectations significantly from VC, i.e., looking to P/E in place of VC won’t change the desired outcomes of investment. For a quick overview read http://en.wikipedia.org/wiki/Private_equity

  • davidshore

    Another great post, Mark, thanks!

    On point for discussion – being “bought” rather than “sold” – is about who is driving the process and who is *perceived* to be more motivated. You’re right – nobody will just “show up” to buy you, you have to cultivate and maintain buyer motivation. And like many things, the longer the courtship the better the outcome.

    Your sage first topic about building relationships with buyers is all about being bought. There is no such thing as a time too early to start this – yes, even before revenue.

    Consider how often software companies evolve their product based on customer and prospect interviews. You could build a thousand features, but you choose the ones that add the most value for your customers because they will likely pay more for it.

    Do the same with potential buyers. Ask: Which revenue streams do they value higher than others? Which customers are more valuable? What metrics and KPIs matter most? Is profit necessary? How large a transaction can they do without public disclosure? (which takes longer); What geographies can they buy in? Perhaps most of all, how does an acquisition change the life of the sponsor of the deal? Ask early and often, just like you would of your customers. Make sure you get together when in the same city or at shows.

    If you can develop relationships with a few strategics, you can set yourself up for a competitive bid when one gets serious. Then the question is timing. Not “lets start to see if anyone out there might be interested”…

    • http://startupcfo.ca/ Mark MacLeod

      Thanks David. The relationship building is selling in my books. It may ultimately lead to a buyer initiating a buying process. But make no mistake – that is a result of a selling effort.

      The questions you pose should really come only when a relationship is far along and purchase is more or less an option on the table. Like the angle of understanding the personal impact on the deal sponsor. So often overlooked yet so important in large (and therefore political) companies