Right now, some investor is asking some technology startup the infamous question, “what’s your exit strategy?” The likely response falls into two categories:
- We’re going to go public
- We’re going to get acquired
For many just starting up, the idea of mapping a path to IPO is so daunting, so far away, that #2 seems like the more realistic, achievable option. “We’ll just build a great tool, get acquired, and go do the next thing…”
In reality, successful acquisitions are very rare, and mapping the stars that need to align for an acquisition to happen is an exercise in chaos theory.
Here’s a minimum list of requirements that need to be met for a deal to go through:
- your company has a technology the acquirer wants
- your company has a team the acquirer wants (usually paired with the above)
- acquirer is convinced buying you is a better option (read: cheaper and faster) than building it themselves
- acquirer has the culture and stomach for doing a deal
- acquirer has an internal sponsor who can convincingly sell upper management on how your company can help them
- acquirer has upper management that can sell the board on why the deal getting done is critical
- acquirer is convinced doing a deal now is the right time
- acquirer has the capital to acquire you
- acquirer has done an acquisition before
- the acquisition terms are agreeable for all parties
Shockingly, the most common “exit strategy” in practice isn’t an exit at all: “we’re going to stay private.” Said response is also a great way to have an investor hang up on you.
It’s understandable. Investors need you to exit for their investment to yield any worthwhile return, but why should you care? Investors have convinced entrepreneurs that plateauing at $20mm with 100 employees and healthy margins is a bad thing. It’s not $100mm. It’s not still growing exponentially. It’s not turning into a miniature city.
They’re right, it might not be an amazingly sweet deal for them, but it’s often the best deal for founders.
While you’re mapping the plan to IPO, or acquisition, include a “stay private” plan and work backwards. You might be surprised where you end up.