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.