Some Quick Thoughts on Exits for Technology Startups

Posted on Nov 9, 2012 | 25 comments


Later today I’m presenting at the annual Rincon Ventures Summit in Santa Barbara

Startup Exits: A Primer from msuster

I thought you might like to see an advance copy of what I’m going to cover.

I speak privately a lot about getting an exit at a startup. I haven’t spoken publicly about it much but since Rincon asked – I agreed.

The main points I’m going to cover today are to demystify a lot of misperceptions people have about startup exists, notably:

  • Acqui-hires are not that frequent, are hard to come by and people make much less money than you think (investors & founders). Often they are “soft landings” for PR purposes
  • The median VC exit price for deals is $70 million (FLAG Capital via Bryce.VC). I’m assuming that’s for positive outcome deals. And I’m certain that many of these deals are not great returns for people because too much money went in
  • There is a mythology amongst some LPs (funds that invest in VCs) and some VCs that “entry price doesn’t matter – only investing in the absolute best entrepreneurs.” That’s bullshit. People justify winners after the fact.
  • There simply aren’t a lot of exits above $100m or even IPOs. So entry price matters a lot. Bimodal returns are a fallacy, many great VC funds are built on the power law curve.
We also are going to talk a lot about startups getting exits and ultimately:
  • Companies are bought, not sold
  • You need to build relationships early. People who tell you otherwise are wrong. They say the same about VC. They are wrong there, too.
  • Being a radar screen of a buyer helps. So, too, does PR. Much as tech companies & VCs hate to admit it.
  • You need to understand motives of buyer (talent, product, revenue, strategic purchase) and where you fit in
  • People hate to acknowledge that location of team matters. Often it does. Outsourcing can be cheap. Remote teams can be higher retention for staff. Both can hurt you in an acquisition.
  • Don’t put all your eggs in the “corp dev basket” – often deals are champions by the business units (product or sales)

If you have any problems downloading deck from above SlideShare presentation you can try this link.

If you want to know more about Rincon Ventures you can see my two separate interviews with their main partners: Jim Andelman & John Greathouse.

  • http://tomordonez.com/ Tom Ordonez

    I would like to know more about the acqui-hires or those that sell their business when they run out of cash or are simply tired of running it. Also would like to know if VCs have found a recipe for success when they are evaluating companies they want to invest in.

  • arniesingh

    Having been on the buy side of 8 acquisitions and seen the dynamics leading up to them I would add the following:

    a) Underscore the value of PR and getting on the radar early – there are so many startups out there, you need to be visible. Marketing to acquirers is no different than marketing to customers. Social proof is especially important.

    b) Understand the motivations of the individuals inside potential acquirers. How will buying your company affect their career? Is their business unit in trouble? Are they looking to get off the bench and run a business unit? Do they have the social capital within the organization to pull off an acquisition?

    c) Understand the company’s SEC disclosure limits. Most public companies can make acquisitions up to a certain amount without disclosing it. If you stay under this amount its much easier to get a deal done. (Note – the amount varies by company).

    d) Never assume that “Big Company X will buy you because it makes sense for their product line Y”. Big companies are run by people with big egos and big agendas, so 90% of acquisitions are driven by personal motivation.

  • arniesingh

    Unless your company is profitable, its very hard to sell it simply because you are tired of running it. If you have some IP but have run out of cash you may find a company that will hire you as an employee and buy the IP in an asset sale.

  • http://joeyevoli.com/ Joe Yevoli

    I’m really interested to hear your thoughts on this: “You need to build relationships early. People who tell you otherwise are wrong. They say the same about VC. They are wrong there, too.” for a few different reasons. One being, I have an advisor/mentor who swears thats updating VC’s on your progress is wrong. I’ve read your “Invest in Lines, Not Dots” post, and tend to agree with it.

  • mironlulic

    I’m a bit torn. We’ve been updating VCs and investors on our progress with Swagsy but I also question if its the right strategy. It gets especially tricky if unforseen circumstances make you miss projections – you end up looking like you can’t execute.

    I think there are two reasons we keep investors in the loop. Firstly, we are cultivating a relationship. Secondly, its because we went to investors too early. We weren’t fundable, at least for the big round we were after, and wasted a lot of time doing the rounds. Now we want to keep those relationships alive because they are waiting to see what happens.

    Wrote a blog about our experience on Socaltech: http://www.socaltech.com/articles/how-we-raised-our-first—-k/a-00203.html

  • jlemkin

    Wow this is a really great prez, Mark. [The one thing I’d love to know/see is also the # of acquisitions > $100m by size range, and how much even smaller those get in each range, and what that means].

  • http://joeyevoli.com/ Joe Yevoli

    That’s exactly it. The advice I’ve been given is that continuously updating these VC’s will just leave them in a “wait and see what happens” phase.

  • http://blog.kwiqly.com/ James Ferguson @kWIQly

    Thanks Mark – useful oversight – But a question ?

    We just bootstrapped our way to Paris.LeWeb startup competition http://paris.leweb.co/2012/leweb/startup-competition and have very little of what you might call strategy on this exit subject. All we know is some big businesses like what we have and we haven’t raised a dime/ penny / cent or rappen yet beyond F&F.

    In my view “talking exit strategy” to experienced VC at this early stage would make us look hopelessly naive.

    In reality as you say buyers buy rather than sellers selling. So my position is “we’ll talk to anyone” – Do you think this is superficial or justifiable ?

  • http://influitive.com/ Abdallah Al-Hakim

    Cool to hear that you are presenting at Paris LeWeb. Make sure you post updates

  • http://blog.kwiqly.com/ James Ferguson @kWIQly

    Thanks for encouragement ! – Hope things are good at engag.io

  • davidshore

    Thanks again Mark!
    And arniesingh

    Tech companies always spend a great deal of time learning what their customer wants and giving it to them to create more value. This increases revenue.

    Few do the same with their potential buyers.

    The latter can be worth just as much to building the price of the exit as the former (company revenue or profit for the valuation equation).

  • http://bothsider.com/ Mark Gavagan

    Terrific points arniesingh – thank you.

  • http://influitive.com/ Abdallah Al-Hakim

    It is going well and lots of exciting things in the pipeline for the future! Hope all is well at your end

  • Lisa O’rrell

    Even Angel investors want to hear your ‘exit strategy’ – as a tech start-up NOT having one makes you look hopelessly naive…

  • Lisa O’rrell

    Excellent point Mark & Arnie – PR & courting possible acquirers is priceless in an overly crowded market place [and it’s just going to get tougher]. There is so much ‘noise’ that you have to get your message out as to why they should be looking @ you and how you are different & better. My years of sales & marketing experience has taught me that it can take a year or more to acquire an A account – once you get them – others take notice and follow. I am using this same strategy for future acquisition of my software start-up.

  • http://blog.kwiqly.com/ James Ferguson @kWIQly

    So I say trade sale – because that’s most likely – and as I see no good reason to suppose we are heading towards IPO – even though we have a big solution in a big market. But honestly we have enough to concentrate on.

    We certainly talk very regularly to potential acquirers, and some have made encouraging noises (but we wont count chickens).

    In reality if an Angel want to hear BS they should ask this question. and in my view it marks them as a little wet behind the ears.

    If a VC asked me, I would assume it was a question about my coachability or perhaps preparedness to step back when the time is right – If so that’s what they should ask.

    I believe for any startup to say they plan to IPO (even if there is one in a gazillion chance sounds utterly stupid if you look at the stats.) – On that basis either I look insufferably arrogant, or plain deluded – which do they want to hear !

  • http://imobilerescue.com/ iMobileRescue Inc

    This is awesome, Mark. I appreciate your realistic approach to it. Makes me think more about iMR, and it’s buy type.

  • http://twitter.com/jesskah Jess Lee

    Great post.

    Btw, the “Embrace Losing” link on your Start-up Advice page is broken. http://www.bothsidesofthetable.com/on-entrepeneurship/

  • JamesHRH

    James – any answer that shows you have not thought of the question makes you look risky. That is the real issue.

    “Exit?” is a question every semi-pro investor thinks they should ask (the best ones don’t, IMO). So, the answer needs to show knowledge & thought.

    I would suggest: “well, there were <100 tech IPOS in the last 5 years, so I think many people don't realize how unlikely that option is for a startup. The likelihood is we will be acquired & if that was to come about, we have these criteria for looking at those opportunities……"

  • JamesHRH

    Very good deck , as usual.

    I think the most powerful slide is the ‘know what you are as a sale slide’.

    But, to be honest, I am not sure there is a VC who publishes online who is more adept at laying out the mechanics of getting funding / acquisition done. Really good stuff.

  • http://www.marketingshow.com Clay Collins

    Hi Mark,

    NP if you don’t have time, but will a video or audio recording of the talk be available at any point. I’d really benefit from it? Maybe as an episode of TWiVC?

    Thanks for considering this request.

    Warm regards,
    Clay

  • http://www.marketingshow.com Clay Collins

    Mark! Thanks so much for posing this. May I put in a request to see the recording if that’s possible? Maybe run it as an episode of TWiVC?

    Thanks a ton,
    Clay

  • http://autoarenda.kiev.ua/ autoarenda

    great) liked everything very much) keep it up and dont stop)

  • http://twitter.com/daveselinger David Selinger

    First off–Mark, great article. This is in the very small class of great, concise, valuable and accurate pieces of content relevant to every entrepreneur.

    Arnie, I agree 100%. Selling because you’re sick of it/out of cash is likely going to be a bad landing. Acquisitions are *VERY* hard for buyers to make successful.

    The cashflow element makes things easier–it increases the chances you *will* be bought; that said, i’m not sure it addresses exit price. You have to remember profitability only makes it possible to buy a business which isn’t 100% strategic (i.e., somewhat opportunistic).

  • http://www.ibla.us/ Meganlisa

    So true! Procrastinating so reading your posts…back at what I was supposed to be doing in a minute…but part of that was preparing to speak to a bunch of high school students on Monday regarding finishing things (which most people don’t). Your post touches on what I’m going to say.
    Finishing is harder than starting; shipping is worth more than an idea. Most busy people don’t respond when you send them the first email. But they read more than they let on, often. I used to work in M&A and can testify first hand that while some deals are quick and easy more often than not it’s getting on the radar screen which leads to a buy/sell. Short term relationships are luck or reputation; long term are results based.
    So glad to read the post and have one other thing to add to my almost done Monday talk. Missed Rincon.
    Back to that…