Look, I’m not going to come right out swinging and make some kind of grand proclamation on this, but I think it might be time for the Triangle, or for that matter any startup hub that isn’t Silicon Valley, to start seriously taking a look at acquisition as a legitimate exit from day one.
August 13, 2015
The Art Of Getting Acquired
Why acquisition is a valid, respectable and increasingly important avenue to consider in startup.
I know what some of the blowback is going to be from this modest proposal. Something along the lines of acquisition being a cop-out which ultimately hurts the startup community and the very idea of entrepreneurism itself.
I get that. Purism. Rock on.
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 think about acquisition, you naively limit your options to either going public or creating a lifestyle company. Don’t get me wrong. Both of those are valid paths. I’ve walked both several times.
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, valuations are reaching astronomical levels, with Valley unicorns, those companies landing $1 billion-plus investments at multi-billion dollar valuations—Uber, AirBnB, Pinterest, SnapChat, etc.—increasing at an alarming rate.
How the hell do you get out? I’m not a wizard. I can’t do that kind of math.
Let’s settle down a bit and take the ridiculous out of the equation. The path to going public is still fraught with danger. It’s unbelievably hard to get to $1 million in revenue. It’s much, much harder to get to $10 million and nearly impossible to get to $100 million. Nevertheless, it’s a good goal. It’s a much better goal if capital is nearby, cheap and easy—or if you have a track record of big, successful exits.
What are two things we lack here, Alex?
Now think about the other angle, the lifestyle business. I learned quickly that once you reach a certain level of revenue, and for me it was right around $1 million per year, it becomes increasingly difficult to sustain that level of performance without taking on a ton of growth.
You can’t just flatline. That’s a fine concept if you’re selling tires or sandwiches or some other commodity, but not if you’re into groundbreaking technology. 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.
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.
Acquisition as a goal is not a cakewalk. 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 valuation and lifestyle being the other two.
It should also not be the ONLY option.
But for a lot of entrepreneurs, it might be the most viable option. Start out, go for broke, 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 through the idea stage, you should have those three options in front of you. Here’s what you need to be doing:
Customers, investors and acquirers. You’re definitely familiar with the first—who are you going to be selling your product to? If you’ve spent time in startup, you’ll know how to get started with the second—researching angels and firms and theses and networking to get intros and showcases and creating decks and elevator pitches.
So how do you build your list of acquirers? This obviously depends on your product, your market and your go-to-market strategy, but a good rule of thumb is to go back to your customer list. Who else is selling to your customers or should be? Who are you disrupting? Who is going to be pissed off that you exist? Who is going to be excited that you exist?
Then work them like your investor list. Build relationships with these potential acquirers, even working relationships.
If there are any companies out there that could potentially be on all three of those lists—customer, investor and acquirer—they should be at the top of all three.
While you shouldn’t be building your product towards acquisition, you should have acquisition in mind when considering features and pivots, just like you would with customers and investors.
Don’t be naive here. The decisions you make when you’re thinking about your exit in terms of a valuation home run—and this is true whether you actively think about your exit or not—are going to turn out differently than the decisions you make to incrementally bring on and keep more customers like you would 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 don’t have.
Acquisition should be in there too. Probably the simplest explanation of this decision-making is around entering a new vertical. Statsheet, the predecessor to Automated Insights, was a sports company. When we decided to go vertical-agnostic, we knew we were eliminating acquisition by a number of sports companies we had great relationships with. We thought long and hard and made the right decision.
Stake out acquirers just like you would your customers and investors. These things take time, and in fact, the acquisition cycle is usually much longer than the sales cycle or 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 acquihires happen, which, by the way, is how most people think of acquisitions and where all the negativity on the subject comes from. Ironically, it’s when acquisition has never been considered and managed that acquihires take place, 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 the website. That’s the worst.
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 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 benefits and zero downside, like I did with ExitEvent, then it becomes a no-brainer.
But even with ExitEvent, it took 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.