First off, the axiom that companies are bought, not sold, is mostly right.
95 times out of 100, you can’t wake up some morning and just go sell your start-up. Unless there are pre-existing relationships that have expressed a desire to buy (which sometimes there are) … calling up CorpDev at Google isn’t going to work.
So to me the real question is — when you get an offer … how do you know?
I’ve been through this 3x:
- One time, we screwed it up. We sold to another hot startup about to IPO — instead of a more complex deal with Amazon. That was an epic failure. It was A Billion Dollars vs. $250m. But that billion was an illusion. We didn’t do the right diligence, not really, not the right way.
- One time, I got it right. I sold my first start-up in ’04 for $50m 12.5 months after funding. That was right because the capital requirements, and the odds for success, were such a challenging mix, that $50m in 12.5 months was clearly, unquestionably, the right outcome. We had 0 doubts then and 0 doubts even now.
- One time, I don’t know. Not very sure I got it right even though it was very logical. The last time seemed like a logical decision in the context of where we were, and the capital markets and valuations were, back then. But not so much today.
I guess my only advice is combine your (x) gut with (y) careful introspection.
- In the first deal, we took a deal that was 5x higher but it imploded later. We didn’t do the diligence.
- The second time, our guts were 100.000% clear. Do it. And the logic was totally clear too. We could never raise enough money to serve a big enough market in our space, not really. And we had to sell 80% of the company in the Series A, which meant it was now or never from a dilution perspective.
- The third time, logic said do it. But the gut was torn. Diligence, 2 years after the last big downturn, said it made sense. But by the time we got to that gap between signing and close, I knew it might not have been the best choice
That third time made sense, but left a frustrated after-taste for years to come.
And whatever you do, know this — when you sell, it’s not yours anymore. It’s theirs. Don’t sell to Do Something Bigger Together, or any nonsense like that. Sometimes that’s actually true, e.g., Android and Google. But very rarely.
And even if it’s true, it’s not yours anymore.
And a few tactical thoughts:
- Get more advice than usual. Talk to as many folks who’ve been through it as you can. It’s not so much that you’ll learn anything new. They will just challenge your thinking on all sides.
- What would you do next? Worth thinking about. Oftentimes, your current startup is your best idea.
- Can you get some secondary liquidity? If you are at $5m-$10m+ ARR, sometimes instead of selling your whole company, you can sell just a smaller piece of your founder’s shares and get enough money to destress your life that way. More here.
- Don’t let competition drive your decision-making process too much. Yes, it can be almost overwhelming when the competition is everywhere, or even growing faster than you. But are you growing fast enough to build a unicorn? To get to $100m ARR — eventually? If so, competition still matters of course. But it’s not as critical to the outcome as you might think. More here.
- Assume you never get another offer that good. Just as a thought exercise. if you don’t take an M&A offer, assume you may never get another offer as good. If you’re OK with that, that’s a clear sign not to sell. If that worries you, then selling might be the best outcome.