If you follow the tech press, it seems every day a new exit is announced. Some big blockbuster deals and lots of small ones. If you're running your own startup, you may often wonder when would be the best time to sell. How do you even approach such an important decision? Here are some thoughts for you.
Start with the end in mind
The starting point in figuring out whether to sell your business is to think about the endgame. What vision do you have for your product or business? What goals did you set for it when you started? Are you still on track? Most technology markets have a "winner takes all or most" mindset. This means that a disproportionate share of the value in any market goes to the top one or two players. You see this in search. Google is massively outperforming its closest rivals. You see the same dynamic in many markets. So, when you think about your vision, think about whether you are on track to be the market leader in your segment.
Consider your stakeholders
You have many stakeholders who are an important part of your business. You probably have co-founders. You have employees, partners, important suppliers, customers, and investors. All have some impact on your decision to sell. Obviously, if you have co-founders, then you need to work through that decision together. In some cases, important partners may be candidates to buy your company.
Investors, especially venture capital firms, have an important role to play in the decision to sell. VCs are after massive returns. If they conclude that you are not on track to be a market leader and to generate the returns they are looking for, they may want an exit. That doesn't mean you just turn around and sell. But it's important to have open and honest conversations with your investors. If you want to keep going and they don't, then you are out of alignment. And being unaligned with your VCs can create all kinds of friction. You spend more time "managing" your investors than managing the company.
How long will it take you to get to the sale price you have today?
Let's say you actually have an offer. Now what? An important step is to think about how long it might take you to achieve the same valuation if you don't sell and keep going by yourself. For example, let's say you raised a venture round a year ago at a $20 million valuation. You still own 60 percent of the company. So, on paper your stake is worth $12 million. Now, a company offers to buy your company for $50 million. You could take that deal and pocket $30 million. Life-changing!
So, the calculus here is to think about how long it would take you to get to the same place. How risky would that be? Do you have to raise more capital or dilute yourself to get there? If so, then maybe you take the deal.
A good rule of thumb is that if it would take you two or more years to get to the same valuation you have been offered today, then maybe take the deal. If you're nearly there and everything's working, then keep going!
Will this serve your mission?
The best entrepreneurs are more motivated by solving a problem than making money. In some cases, selling to a bigger company can make it easy for you to solve your problem and deliver on your company's mission. After all, if a company can afford to buy you, then it has the resources, channels to market, and other pieces that you may be missing. If that's tempting to you, do your diligence to find how much autonomy you will have to keep working on your mission if you become part of another company.
What else will you do?
This final consideration is a deeply personal one. If you love what you do, what will you do with yourself if you are no longer doing it? Only you can answer that. Unfortunately, this point is often overlooked in the sale process. Take the time to think it through.