Silicon Valley talent comes from all over the world. Approximately 30 percent of software, semiconductor and computing companies in the US are founded by foreigners, and over 50 percent of tech startups in Silicon Valley are founded by immigrants. Consider this along with the fact that an absurdly high number of acquisitions in the tech industry (and acquisitions in general) happen right here in California.
If you have a successful startup, you are more likely to come from Budapest than Burlingame, but you are also most likely to find an exit in the Valley. Hopefully this guest post should serve as a guidebook for everyone, but should be especially useful to founders who suddenly find themselves landing at SFO with a nine hour time delay and have to take a taxi straight to a board room filled with EVPs and lawyers.
If you are a founder (from anywhere in the world), you think you have built something exceptional, and if you dream of moving to Cupertino or Mountain View, never seeing winter again and wearing a nice, shiny ‘Vice President’ badge at Apple or Google, please read carefully.
I’m going to assume that you’ve done all the pre-exit stuff perfectly (viz. building a business). A few things stand out that any company needs to do before even considering talking to potential buyers. I’ll just summarize these, because this post is really for those who already understand the basics.
- Differentiation – you have something everyone needs. In many cases (especially for non-US startups) this will be world-class IP: you have built a time machine; you have invented near light-speed space travel at almost zero cost. In our most recent case it was solving a problem with real-time Web collaboration that even Google had struggled for years to get right. Maybe you have captured a really, really important customer segment, maybe your growth is off the charts and Yahoo! needs your customers. If the latter has happened, you are probably already incorporated in Delaware, and the CEO has been in Palo Alto for 3 years. More likely, if you are a technician from outside the USA, you have some very interesting intellectual property (that you have protected well; this will be the subject of a later post), and you have turned that into an even more interesting product, and a successful business.
- Business Development – you have hired someone senior in the Valley full-time. You have been doing BD for 12 months, and you have US customers. At least a pilot. You have a few big partners lined up. Your BD person is doing an excellent job. She is senior. She coordinates well across time zones, and spends 10-weeks a year at company HQ. There is trust. Results. The whole thing runs like clockwork, because you invested in skilled business development early. And you cannot invest in good BD early enough: take a quick look at the a16z.com “Team” page and you’ll get the idea. Andreessen Horowitz makes sure their companies are well furnished with BD and growth resources from day one. For foreign companies, also please note: US customer revenue will generally count approximately 2x in your exit valuation vs. non-US. Unless you own China. Then ignore that.
- The story – you have created a compelling story out of your growth, your differentiation, and you know how to tell it. You have a whole suite of investor and marketing material that looks completely professional (and completely ‘American’). Hire a designer. Get local advice. Practice it, and polish it 500 times. NO matter how simple the story you are telling, keep working on it. Make it amazing. And when it is good, start pushing it out to the press. Make a plan that shows you are hitting milestones systematically. Your company blog should also reflect this. There should be VERY regular updates, significant milestones. You are growing fast, and everyone knows it. Your company radiates success. A quiet company = a company that is facing internal struggles. An outdated blog smells like death.
- Sales – you have customers, and you have built a believable pipeline. Sales, BD and CEO spend a LOT of time in New York or California. Prioritize your sales efforts accordingly!
- Product – Non-Silicon Valley entrepreneurs often don’t realize how quickly they need to move. Research your market in the US, Asia. Figure out your roadmap and hit milestones with punishing accuracy. If something doesn’t work in your CTO /product team, deal with it immediately. Immediately. Break it, and repair it as fast as you can. Product announcements that go nowhere, delayed releases, features that are behind the curve. Death.
I’m assuming that everything else is perfect. You have fought like crazy, and your business is growing. Your product works. Customers need it. The market is hot. You have revenue, and perhaps a lot of it. You are in VentureBeat, TechCrunch, and have a passing mention in Forbes.
Now comes the tricky part. I was talking with a good friend who has a successful US tech business. Revenue is doubling every year. They have nearly one hundred employees after just 3 years. Sexy technology. Purely bootstrapped. Very hot market. Things are happening. But they haven’t been acquired.
I’m amazed anyone ever gets acquired. It’s the hardest thing. The process is so weird, and everything can go wrong at any moment. And it usually does. Selling a company is very different from selling a product. The perception of risk on the part of the buyer is different, and there are often far more people involved than at any other significant event in the life of your company. An acquisition is a very, very fragile thing. And it often takes much longer than you planned. You need to go about it with scientific precision, and complete dedication.
You want to be bought, not sold
This is obvious. You don’t want to set the premise that you are looking to be acquired. It signals immediately that something is wrong: the business is unsustainable, the founders lack confidence, the market is about to head south.
But you do want to open the acquisition conversation with potential buyers, and there are many ways of doing this without immediately putting yourself up for sale. One of the best ways is to set an early expectation about your fundraising agenda. Your growth is great. The market shows no sign of cooling off, so you are raising an $XX million series-B round in Q4 of this year. You need this plan. Start building it now because it will be the backstop to many future acquisition conversations.
If you are lucky enough that a potential buyer opens the conversation, and asks up front “Is your company for sale?” (or, even better, ‘We want to acquire your company!’) the answer is always the same if it is the first conversation you have around this subject: We weren’t considering selling. Growth is great; we are raising money in Q4. But, if the price were right, we might consider it. And leave it at that for the moment.
Now the entire conversation with all of your other partners changes. Your company may or may not be up for sale. Someone has made an overture, but your “plan A” remains customer acquisition, fundraising and growth. You have a limited window, and you want to make sure that all viable acquirers participate, but you don’t want to be desperate or pushy. You also don’t want to ruin your pipeline, or scare anyone off. Shareholders and board members can help drive these conversations while not jeopardizing customer relationships. This is the time when you need to organize internally, systematically, and it becomes a process.
If no one has proposed acquiring, then you need to ask yourself ‘Why?’ Revisit points 1-5, above, and do them better.
So you have built a solid business with a clear exit path, you have a soft offer, you engaged your investors and your board, and you have your early M&A messaging under control. And you have also built a clear plan B (this should always involve raising funds and/or accelerated growth), tested it, and your buyer is aware. Now things start to get tricky…
This is part one of a four-part series on start up exits by SpeedInvest partner Erik Bovee.