When startups should look to sell and when to keep fighting | TechCrunch Disrupt 2024

Startups and Acquisitions

• Startups are 16 times more likely to be acquired than to go through an Initial Public Offering (IPO), but even then, only 1.5% of startups are acquired, making it a challenging journey (29s).
• Kamaki, a founder, had a unique experience of selling her company, Drawbridge, to LinkedIn while giving birth, describing it as a once-in-a-lifetime experience with significant emotional upheaval (1m6s).
• As a parent, Kamaki finds being a parent much harder than being a founder, but selling her company was a significant experience that she wouldn't give up (1m1s).
• Naven, another founder, notes that acquisitions are statistically more likely than IPOs and can be more successful in many scenarios, but require founders to be mentally and physically prepared for an endurance journey (2m6s).

Navigating the Acquisition Process

• Naven's experience with the acquisition process involved a satisfactory outcome, but a heavy-duty diligence process, especially in a regulated industry, which required being mentally ready for the challenges (2m32s).
• Naven mentions that during the acquisition process, there will be at least three times when it feels like the deal will fall through, but perseverance is key to getting through those moments (3m8s).
• Naine, another founder, regrets selling his first company, Nirvana Systems, too early, but acknowledges that it was a catalyst for hardware startups and showed interest in AI chip companies (3m24s).

Focus on Building, Not Selling

• Founders often underestimate their own place in the market and the reality of their situation, including personal sacrifices, which can make a term sheet appealing, especially for first-time founders, as it can alleviate pain and provide financial security for themselves and their families (3m43s).
• As a seed investor and adviser, the speaker believes that building a company should be the primary focus, rather than setting it up for sale, as this approach can lead to a better outcome, and opportunities for acquisition should be considered opportunistically (4m47s).
• The speaker's first exit was opportunistic, with a large cloud provider initiating the conversation, and the company ended up being acquired by Intel for $400 million, which seemed like a good number at the time, but the reality of the acquisition was different from expectations (5m25s).

Factors to Consider When Selling

• As an investor, the speaker considers three key factors when deciding whether to keep going or sell a company, although this framework is not explicitly stated in the provided text (6m43s).
• The speaker notes that having a successful exit can change one's perspective, and they acknowledge the humility of other founders who have had successful exits, while also sharing their own experiences of selling a company and rejecting an acquisition offer (6m32s).
• A company should have a product that customers love and use, sell efficiently, and have money in the bank to continue operating successfully (7m0s).
• If these three factors are in place in a good market, it's generally best to keep going, as seen in companies like MongoDB, Cloud Era, Data Breaks, Conflu, and Gong (7m12s).
• However, acknowledging that humans run companies, it's essential to find moments to give secondary options to founders, refresh them, and revitalize them to keep going (7m30s).
• If two of the three factors are not working in a company's favor, such as a product not being used by customers or an inability to sell or raise money, it's crucial to be open-minded and consider selling the company (7m44s).
• Selling a company is easier when it has raised $10-20 million and can still make a win-win situation for founders and investors, rather than raising hundreds of millions and struggling (8m6s).
• There are around 600 unicorns, but only about 50 will go public, and many will have to face the harsh reality of not being able to sell the company effectively after raising over $100-200 million and burning a lot of money (8m24s).
• Founders are people, and it's essential to acknowledge their well-being and responsibility to investors and teams, making it crucial to consider the human aspect when deciding whether to sell or keep going (8m58s).
• Investors may prioritize perseverance, but the reality is that most investors have a few hits that make a 100x return, and it's essential to find a good home for companies that won't reach that level (9m33s).

Evaluating Investors and Acquisitions

• Acquisitions can include retention packages for employees, and if done correctly, these employees may start new companies and provide better outcomes in the future (10m1s).
• When evaluating investors, it's essential to look for those who will have your back, rather than just focusing on name brands or HR benefits, as the latter may not be as useful in practice (10m22s).
• A supportive board member can make a significant difference, as seen in the case of Nirvana in 2016, where a board member offered to write a check for a million dollars to help the company (10m41s).

Managing Finances and Runway

• When it comes to cash in the bank, having enough money plus two to three quarters to raise the next round is a good guideline, taking into account the burn rate and milestones to be achieved (11m33s).
• Having too much money can be a problem, as it may lead to unnecessary spending, and CEOs should separate the ability to raise money from the desire to spend it (11m56s).
• A good rule of thumb is to have at least 6 to 8 quarters of money in the bank at all times to give yourself time to execute and raise the next round (12m24s).
• The "oh shit" rule is a useful principle, where you don't hire or spend until your team is at a breaking point, and this applies to all areas of the company, including sales and engineering (12m53s).
• Maintaining discipline in spending and hiring can help you raise any amount of money without it becoming a problem, as seen in the case of disciplined CEOs like Ali (13m27s).
• Newer founders often overspend and don't manage their runway effectively, whereas experienced CEOs can operate with less money and still achieve success (13m39s).
• Every success story has had tumultuous paths, and founders should be mentally prepared for situations where they might not have the typical 6-8 quarters of runway, but instead have 2-3 quarters (14m6s).
• First-time founders are statistically more likely to encounter unexpected challenges, but it's essential to not give up and be prepared for unexpected moments (14m32s).
• Each founder writes their own story, and there is no written rule of law for all founders, making mental preparation crucial for handling unexpected situations (14m53s).
• Founders should be ready for unexpected moments and be prepared to make tough decisions, such as selling the company, if it's the right strategic move (15m0s).

The Founder's Perspective on Selling

• Kamakshi Sivaramakrishnan's company was acquired by Snowflake, but she didn't feel like she threw in the towel, as the strategic synergies were strong, and it felt like a rare moment where 1+1 was greater than 2 (15m20s).
• Founders should consider selling their company if it's the right situation, as it can provide access to resources and accelerate growth, but it's a case-by-case basis (15m51s).
• Naveen Gavini's first company took 7 years to exit, and he didn't feel like he threw in the towel, as it was the right moment given the circumstances (16m21s).
• Naveen Gavini's second company was acquired, and he didn't feel like he threw in the towel, but his first company was a different story, and he had a strong bias against acquisition at the time (16m44s).

Strategic Acquisitions and Partnerships

• The decision to sell a startup can be influenced by various factors, including the difficulty of building a sales channel and the need to raise funds, with the founder recalling a personal experience of being approached by several large companies during a funding round (17m9s).
• The founder turned down these offers, but considered an acquisition by Databricks as a strategic opportunity to leverage their team and resources to scale the business (17m36s).
• The founder was trying to strike up partnerships with Databricks and Snowflake beforehand, and had even been invited to speak at Snowflake's summit, but ultimately decided not to due to the pending acquisition (18m13s).
• The founder notes that as a founder, it's easy to look back and think that selling the company was a mistake, but it's often forgotten that the acquirer had to invest significant resources to scale the business (19m1s).
• Many founders who sell their companies will say that they threw in the towel too early, but the acquirer took on significant risk and invested heavily to achieve success, and the founder often receives retention bonuses tied to the company's performance (19m24s).
• The founder believes that even if given a second chance, many founders would still make the same decision to sell, as the upfront value received is often significant, and acquirer situations are different from those where the founder has a great product but can't raise enough money (19m51s).

Cultural Fit and Integration

• Counterfactual reasoning is a concept from the machine learning world that is very hard to navigate, and cultural fit is a crucial aspect to consider when making decisions about a startup's future, especially when evaluating potential partnerships or acquisitions (20m4s).
• Cultural fit can be determined through informal interactions, such as going to dinner with potential partners or co-founders, which can help establish a sense of familiarity and shared values (20m19s).
• The importance of cultural fit lies in the fact that it can help resolve disagreements and ensure a smooth partnership, especially when looking for accelerated go-to-market motion (21m1s).
• Partnership-oriented routes, such as business development (BD) to customer development (CD), can be an effective way to understand the people involved on the other side and evaluate the viability of success (21m5s).
• Evaluating the people involved in a potential partnership is crucial, as foreign body rejection can be a real issue, and it's essential to assess whether the partnership is likely to succeed (21m47s).
• Different approaches can be taken to get to know potential partners, such as spending time with their teams, attending customer meetings, and working on joint opportunities, as was the case with Snowflake (22m8s).
• Integrating with a new company can be challenging, but it's essential to figure out how to disagree with grace and navigate potential conflicts (22m47s).
• The transition to being part of a new company can be emotional, especially for founders who have invested a lot of time and effort into their startup (22m59s).
• Founders may experience a range of emotions, including depression, even if they feel they made the right decision, and it's essential to acknowledge and process these emotions (23m1s).
• Founders may experience a strong emotional response when their company is acquired, as it can be a realization of the end of an era, and there's often personal ownership involved (23m16s).
• Integrating with the acquiring company can be a challenging process that requires working in lockstep with the new team, trying new things, and learning from both successes and failures (23m41s).
• The integration process can take time, and it's essential to work together to achieve the best possible outcome, as seen in the example of a 16-month integration process (23m56s).
• Founders may need to reset and adapt to a new framework and construct within the acquiring company, which can be an adjustment (24m32s).

Go-to-Market Strategy and Integration

• Having gone through the process before can make founders better prepared for the challenges and pitfalls of integration, allowing them to set themselves and their team up for success (24m51s).
• The ability to quickly integrate and go to market with a new product can be a significant advantage, as seen in the example of a company going GA in just four months after acquisition (25m17s).
• Founders should prioritize building buy-in with the product and go-to-market teams, especially in strategic acquisitions, to ensure a smooth integration and minimize the risk of rejection by the sales team (25m54s).
• Spending time with the go-to-market team to socialize the new product and vision can help increase the chances of successful integration and adoption (26m31s).
• When considering an acquisition, founders should spend time with the acquirer's go-to-market team to ensure synergy and avoid foreign body rejection by the sales team, as it's harder to sell when the team doesn't know the people as much (26m44s).
• Founders should also be cautious of technically heavy teams with a "not invented here" (NIH) culture, where the product team may say the right things but not truly support the acquisition, and focus on synergistic and important areas (27m1s).
• Earnouts should be tied to the joint success of the team, rather than just time-based, to align incentives and prevent team members from checking out early (27m31s).
• Spending time with the go-to-market team is critical to avoid foreign body rejection, which can manifest itself hardest and fastest in this area (28m14s).
• Founders should spend time with the acquirer's product and go-to-market team pre-acquisition to build relationships and ensure a smooth transition (28m30s).
• In some cases, a strong founder-led culture can help mitigate foreign body rejection, as seen in the example of Databricks (28m45s).

Transitioning to a Larger Organization

• Founders must transition from being the shot caller to working inside a larger organization, which can be a challenging shift in mindset and requires learning new skills (29m26s).
• Founders can learn from their experiences in larger organizations, such as LinkedIn and Microsoft, to adapt to this new role (29m48s).
• Founders can learn valuable skills and gain humility by working with experienced leaders and going through acquisitions, as seen in the cases of LinkedIn and Snowflake, which can make them better leaders and founders in the long run (29m54s).
• Having different acquisitions can result in varying transitions for founders, requiring them to adapt to new roles and responsibilities, such as scaling an organization or working with a new set of founders (30m51s).
• Founders may face difficulties when they are no longer the CEO and have to work with a larger group, but they need to get over it and adapt to the new dynamics (31m21s).

Focus on Building, Not Exiting

• Planning for an exit from the start can put founders in twisted scenarios, both mentally and physically, and may not lead to positive outcomes, as companies are often bought, not sold, when the right things happen at the right stage (32m45s).
• It's challenging to plan for an exit by working backward from a goal, and instead, founders should focus on creating the right product, selling efficiently, and having the necessary capital, allowing them to enjoy the journey and make decisions based on the current situation (32m20s).
• Founders should not overthink the exit strategy and instead focus on building a successful company, as planning for an exit can be counterproductive and may not lead to the desired outcome (33m0s).
• Building a successful startup involves creating something people want to use that solves a problem, and everything else will follow, rather than planning an exit and working back from it (33m13s).

Knowing When to Sell

• Knowing when to sell a startup depends on personal and market factors, and some founders may want a quick win and a good position at a larger company (33m58s).
• A startup may be ready to sell when it has solved a problem that a larger company cannot, even if it doesn't have huge revenue yet, as seen in the example of WhatsApp's acquisition by Facebook (34m17s).
• In scenarios where a startup has a technology component that a larger company cannot replicate due to internal structural issues, it may be a good time to sell when the startup has shown traction or potential for traction (34m30s).
• Founders should be aware that going through an acquisition requires a personal adjustment, including adapting to a new dynamic, building consensus, and navigating a new organization and culture (35m9s).
• This adjustment can be challenging and requires finding the right tools and mindset to handle the change productively and efficiently (36m11s).
• Different individuals respond to this adjustment differently, and it may take multiple experiences to develop the necessary skills and mindset (35m57s).

Brain Rape and Protecting Your Startup

• Founders often face difficult decisions, including when to sell their company or keep fighting, and may need to discuss their feelings with a trusted advisor or psychiatrist (36m21s).
• The term "brain rape" refers to the practice of larger companies trying to understand the technology and competitive power of a smaller startup, often through conversations that may seem like acquisition talks but are actually attempts to gather information (36m43s).
• This practice is real and can happen to startups, as it did to Nirvana, the speaker's first company, when a large electric car maker engaged in such behavior (37m20s).
• To avoid falling victim to this practice, founders should be careful about what information they share and use their gut instinct to gauge interest without giving away their "secret sauce" (37m35s).
• Good buyers do not engage in such practices, and founders should rely on their instincts, which are sharpened by their everyday experiences, to make decisions (38m10s).

Investor Perspectives on Exit Strategies

• When evaluating startups, investors do not typically give much weight to exit strategy, instead focusing on the market, customer needs, and the founder's drive and resilience (38m57s).
• Investors usually invest in series A and B rounds, 8-10 years away from an exit, and plan to get to the next round with progressively higher valuations and better terms, rather than planning for the exit itself (39m0s).
• Strategic exits often occur when a company is going from series A to B or B to C, and investors may start planning for an exit if a company is 7-8 years into its cycle and facing a platform shift, such as the rise of generative AI (39m45s).
• Companies built in the first generation of machine learning that have been around for 7-8 years, haven't made a product pivot, and have a $50-100 million business while burning money, should consider turning profitable and finding a strategic outcome rather than raising more money (39m54s).
• Exit planning is usually considered once a company is 5-7 years old and there's no clear IPO exit in sight (40m18s).
• At the series A or series B stage, discussing exit planning can be a turnoff for investors, as it may indicate that the founder is not focused on building the company (40m28s).
• A good framework for founders is to focus on building their company, and if the right offer comes along, consider it (40m40s).
• Founders should not prioritize planning an exit, but rather focus on growing their business, and be open to opportunities that may arise (40m43s).