For every startup that succeeds with a big funding round, a high revenue business, or a billion-dollar exit, there are thousands of bootstrapped startups with a valuable service that limp along with limited revenue. We're all familiar with these companies and their founders. They've created a business with their blood, sweat, and tears that in many cases continues to provide a valuable service to their loyal customers, but never managed to get to scale.
Many founders in this position waste their time trying to convince buyers their revenue has potential, but in my 19 years, I don't know a single astute buyer who has ever been excited by that pitch. But what is a stagnating startup founder supposed to do? Two words: strategic sale.
A strategic sale is when a company buys another company not for its revenue, but because it wants to acquire that company's intellectual property, technology, staff (as in an aqui-hire), or even its customer base.
Mark Fromson is the founder of LocalSolo, a west coast based local freelance network that grew to 28,000 curated freelancers and 9,500 employers in major market cities over the last few years . The idea was to connect businesses with higher-end freelance talent in their city, rather than offshore freelancers. It's a service that worked very well for both sides of the marketplace, but ultimately, Fromson says, it couldn't scale without the high viral revenue or VC investment to spend on sales and marketing.
"The platform basically ran itself so my co-founder and I turned to consulting work to pay the bills," Fromson says. "The revenue slowly shrank from sales and marketing neglect, so ultimately I knew I had to either abandon it, or look for a buyer." He spent a year engineering his strategic sale and ultimately found a buyer in a potential competitor. It was a tough decision, but in the end, the best way forward for Fromson was to sell to Communo.
Here are four pieces of advice Fromson has for companies considering a strategic sale:
1. Don't let the company die.
Do whatever you can do to keep your current customers happy and your startup operational at a minimum. You can't have a strategic sale when there's nothing left to sell.
2. Tell everyone you want to sell.
Quietly, let your connections in the startup world know that you're looking for a strategic buyer. In turn, you'll often be given warm introductions can spark the right type of conversations. But be classy--this doesn't mean posting on social media.
3. Make a target list of all your competitors.
Reach out to the founders of your competitor companies to start a conversation. Maybe one of them has just closed a round and their investors are telling them to grow fast--and you might be just what they're looking for.
4. Make a target list of companies in the larger space.
This is often where the magic happens--where the integration of your assets opens up new strategic possibilities for another company. Start by thinking about whether a potential buyer would have made a good strategic partner with your company. Reach out to their people. Be relentless, but always friendly and never desperate.
Let's be clear: Fromson's acquisition was not a bad thing. His company didn't go out of business. He didn't lose the money of friends and family. He doesn't have to fire anyone. The strategic sale was good for the founders, the customers, and the acquiring company. The founders live to fight another day, the customers get a new, better service, and the acquiring company gets growth and an injection of new customers and new team members.
When giving up isn't an option, finding a strategic match and engineering a sale may not be the billion-dollar exit most entrepreneurs fantasize about, but it is a positive exit.