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.