It’s time for entrepreneurs, especially those located anywhere that isn’t Silicon Valley, to start seriously looking at acquisition as a legitimate exit.
Not too long ago, I found myself in the fortunate position of selling two companies within 12 months. Looking back now, with plenty of hindsight, both sales wound up being the smartest thing I could have done at the time.
So let’s talk about getting your company acquired, starting with why.
With unicorn-propelled valuations skyrocketing and VC investment starting to wane, selling your company at a decent return might be the more sensible option. I know what some of the light blowback is going to be for this modest proposal: Acquisition is an easy out, reserved for when things go horribly wrong. Or acquisition is giving up, stopping short of the home run that every founder should be dreaming of.
I get that. But that’s a view you get when you look at acquisition as a by-product of entrepreneurism and not as what it should be — a goal.
Not THE goal, but A goal.
If you never consider acquisition, you naively limit your options to either going public or running a lifestyle company. Don’t get me wrong. Both of those are valid paths.
But here, there and everywhere that isn’t the Valley, the amount of money you need to raise to get to the public markets is nearly impossible to scrape together. Further, as valuations reach astronomical levels, the amount of investment needed just to play that game borders on highly improbable.
How the hell do you get out of that infinite loop? I’m not a wizard. I can’t do that kind of math.
Not every startup is a home run, and not every venture needs to be all-in-or-die. Acquisition as a strategy can give the founding team options, like being able to start something else, or bringing on new and more powerful resources to further the mission. Either way, everyone gets paid, including your early investors, which means you get to do it again.
The good news is that you don’t have to do much of anything different, in terms of growth strategy, and you’ll have an escape from perpetually chasing that next cash infusion and monster valuation.
First, don’t start an acquisition strategy, or any exit strategy, from day one, and by day one I mean the day you realize that you’ve got more than an idea and a logo. Before you start thinking about an exit, at a minimum you should be revenue positive and cash heavy, and then you should only be spending a fraction of a percent of your brainpower on it.
But you should be thinking about your exit at some point. So let’s talk about all the exit options.
The path to going public is all about revenue. It’s unbelievably hard to get to $1 million in annual revenue. It’s much, much harder to get to $10 million and only a very few ever get to $100 million. Nevertheless, $100 million is a good gate in terms of where you should start thinking about going public. To get to that kind of money, you’ll need to raise money, which is easier if capital is nearby, cheap and easy — or if you have a track record of big, successful exits.
Now think about the other option, which is no exit at all, or what’s called a lifestyle business. I learned quickly that once you reach a certain level of revenue, and for me it was right around $1 million annually, it becomes increasingly difficult to sustain that level of performance without taking on a ton of growth.
Even in a lifestyle business, you need to grow. And the more success you have, the faster you need to innovate to maintain that revenue. That means risk, which means mitigation, which will eventually mean investment, either from your company coffers or from outside capital. All businesses that do not grow, end. If you can stall that ending until you make it to retirement age, that’s awesome.
But that’s not why you got into startup.
Now, I would go so far as to say that leveling off a lifestyle business to a sustainable-but-satisfying level of growth is just as hard as building a company with VC money. Your biggest and best customers become your investors. This gives you more flexibility and control, for sure, but unless you’re taking on risk to improve and innovate, they will leave you at some point.
Acquisition as an exit option is not a panacea. It’s not a release valve, it’s not an escape pod, and it’s not a fallback. This is the most common misconception of building toward acquisition. It shouldn’t be the final option, it should be the third option, with the public markets and a lifestyle business being the other two.
Acquisition should also not be the ONLY option. You should be planning for all three.
That said, for a lot of entrepreneurs, acquisition is usually the most viable option. Start out, fire the rocket, sell the company, repeat, but with a brand new idea and another roller coaster ride. Damn, that’s why I’m in startup anyway, to fire the rocket.
So as you’re starting out, as soon as you get to the point where you’re paying all the bills and you have money coming back in, about the time where you start paying yourself a decent salary, you should have all three exit options in front of you. In terms of acquisition strategy, here’s what you need to be doing:
Create Three Lists: Customers, Investors, and Partners
You’re definitely familiar with your customers, so make a list of who you’re selling your product to. Then add the customers you want but don’t have yet.
Now pare this list down to only the largest and most deeply-pocketed. This is a lot harder if you’re a B2C company than if you’re B2B, so with B2C be thinking about where your customers might cluster, as well as other companies that cater to them where your product might be a natural addition. And definitely include your competition, the ones that are bigger than you anyway.
As for investors, if you’re growing, at least some of your investors or investor targets should be strategic — meaning they’re not angels and VCs, but large corporations for whom your company might be included in their innovation path.
Then consider any partners, those companies who work with you to produce, market, or sell your product. The larger ones might be looking to build on your symbiotic relationship and take it in-house.
Then work all three groups like you work your investor list. Build relationships with all these potential acquirers, working relationships where you discuss the possibility openly.
Of the two companies I mentioned I sold at the beginning of this post, one of those acquisition strategies started when I offhandedly joked with the CEO of the acquirer, a partner at the time, that he should just straight-up buy us. Eight months and a lot of lawyers and paperwork later, that’s just what he did.
Seek Out Three-fers and Start With Them
If there are any companies on, or potentially could be on, all three of those lists — customer, investor, and partner— they should be at the top of all three.
Then… Do What You Do, Just Don’t Slam the Door
While you shouldn’t be building your company towards acquisition, you should have acquisition in mind when considering features and pivots, just like you would with customers, investors, and partners.
This is because the growth decisions you make when you’re thinking about your exit— and this is true whether you actively think about your exit or not — are going to turn out differently than the decisions you would make with a lifestyle business.
To put it way too simply: With a lifestyle business, you’re building for the customers you have. For a valuation business, you’re building for the customers you want.
Probably the simplest explanation of this decision-making is around entering a new vertical. I’ll use the example of the other acquired company I mentioned at the top. Statsheet, the predecessor to Automated Insights, was a sports company. When we decided to become a Natural Language Generation company and do our thing for customers outside of sports, we knew we were dinging our chances of acquisition by a number of sports companies we had great relationships with, as customers, investors, and partners. We thought long and hard and made the right decision. We were ultimately acquired by a private equity firm that owned, among other things, a sports company.
Build Your Acquirer Relationships Early
Stake out acquirers and drop the idea on them long before you’re ready to exit. These things take time, and in fact, the acquisition cycle is usually much longer than the investment cycle.
There’s nothing uglier than realizing acquisition is your last, best option and you don’t already have those relationships in place. This is how acqui-hires (bad acquisitions) happen. Ironically, it’s usually when acquisition has never been considered that acqui-hires take place, also usually at a steep discount.
But even acquihires aren’t the worst exit. You know what the worst exit is? That email to all your customers notifying them that it’s been a fabulous, life-changing run and the doors close in 30 days. Wait, no, it’s the 404 error on your website. That’s the worst exit.
Check Your Ego
When I start something, I believe I’m either going to go public, get acquired, or run the business until I’m 65. At various points, those options will fall away. If I realize I’ve got a triple (not a home run) on my hands, I won’t go after VC money because it would be a mistake. If I take VC money, the lifestyle business is no longer an option. If I’m getting inbound acquisition interest early on and can see all the benefits and zero downside, then acquisition becomes a no-brainer as long as I don’t let my ego get in the way.
Because even when inbound acquisition interest comes right to me unsolicited, it takes me forever to start listening to that inbound interest. I’m an entrepreneur, and it’s like I’m programmed to tune out what sounds like selling out. Let me tell you, fight that programming, because when acquisition is planned for and it works, it’s a beautiful thing.
Until it’s not, but that’s a whole other post.
If you’re interested in the story of What I Learned From Selling Two Startups in 12 Months, you can read that here.