The following is adapted from Getting Acquired.
In most cases, selling a startup is a founder’s dream come true. We see it from the days we first open our doors—the culmination of everything we work so hard to accomplish.
When the time actually arrives to put the virtual “For Sale” sign up on our virtual office window, the process can turn into a nightmare. With preparedness, however, you can avoid that scenario and live happily ever after.
There are several important data points that can help you plan your exit. Understand these, and you’ll know when your startup is most likely to be acquired and when the time is best for you to sell. Let’s explore the key factors involved in understanding both of those situations.
What Motivates Buyers?
Putting yourself in the buyer’s shoes can shed a lot of light on their strategy and ultimately, give you an edge in negotiations. Typically, a buyer looks for an acquisition to provide either a strategic advantage or for accelerated financial growth.
A strategic acquisition aims to increase the buyer’s revenue or help them enter an emerging market quickly. A larger company will see strategic value in absorbing a startup when its technologies, teams, customers, or all of the above prove valuable. When Verizon acquired AOL, for example, it was interested in AOL’s mobile advertising technology and how it would help grow its revenue and better serve customers.
Financial buyers are often Private Equity (PE) firms with the capital and strategies to grow a company and raise its value. Their ultimate goal is to build it to an Initial Public Offering (IPO), sell its share, or sell the company at a higher value in the future. In 2017, for example, Great Hill Partners bought ZoomInfo for $200 million and resold it a year later for $400 million to its main competitor, DiscoverOrg.
What Are Buyers Looking For
Now that you know what motivates buyers, it’s key to understand what can make your startup an attractive prospect for them. Typically, this comes down to three things: novelty, market visibility, and size.
Novelty is a strange phenomenon. Some buyers just love to hop on whatever they see as trending in the marketplace or a unique offering that they can expand upon. It’s important to realize that buyers are spoiled for choice, so to stand a chance of being acquired, your company needs to stand out due to your Annual Recorded Revenue (ARR), technology, or overall proposition. You don’t have to be totally unique, but you need to be compelling in one of these three ways.
Market visibility cannot be overlooked when prepping your business for sale. Small yet immensely profitable startups can struggle to find interested buyers because so much attention and opportunity is paid to the larger startups. To counter this, ensure your startup’s story is strong enough to get people talking about it.
Size matters when it comes to business acquisition in more ways than just market visibility. Smaller startups are less attractive to buyers because there is less to financially or strategically gain through acquisition. These startups usually fall under a buyer’s “wait and see” category. Most financial private equity buyers won’t show interest until a startup has $10 million annual recurring revenue (ARR). Even an interested strategic acquirer may not show interest until the $5 million ARR threshold.
Also, since size often correlates with fundraising stages, which influence how easy (or not) it is to sell your startup, let’s take a look at your chances of acquisition at each stage of fundraising.
When Is the Best Time to Sell?
Every round of funding is called a series. The first is series A, then series B, and so on. Your business is more likely to get acquired further down the fundraising route. In fact, most startups get acquired during series E. That simply indicates that each successful round of fundraising indicates that your business has something special to offer. Why would people continue to invest otherwise?
The paradox of timing your acquisition lies in the fact that the earlier you can sell, the better the outcome is for you. While it’s true that only a small percentage of startups get acquired at pre-series A, a vast majority of them never make it to the next stage.
The moral of the story is that if someone falls in love with your business for whatever reason—novelty, market visibility, sheer size, or any other reason—and they make you a solid offer, why not get out while the going is good.
If you’re a serial entrepreneur, like myself, this is indeed the dream true for most founders. The earlier you can sell, the better. Not only does this allow you to deflate risk entirely by cashing out, but it also allows you to focus on new projects, goals, and ambitions.
For more advice on knowing your exits, you can find Getting Acquired on Amazon.
Andrew Gazdecki is a four-time startup founder with three-time exits, former CRO, and founder of MicroAcquire. Gazdecki has been featured in The New York Times, Forbes, Wall Street Journal, Inc. Magazine, and Entrepreneur Magazine, as well as prominent industry blogs such as Mashable, TechCrunch, and VentureBeat. Now, for the first time, Gazdecki shares the complete story of the company that started it all.