The 10 commandments of selling your startup (TEDx talk in Berlin June 2018)
You start a business, work incredibly hard and build a business of real quality. A few years in, you get a call from a senior exec at a large company who wants to buy your business. It’s exciting but your life savings are at stake. Your investors try to help, but especially in new hubs like Berlin, they often don’t have much experience. In that moment, suddenly you realise: anyone can start a business, many can build one, but few entrepreneurs can sell, or exit, their business well. I have helped entrepreneurs do great exits for 25 years, and I am here to show you how to do this really well.
Every hour somewhere in the world a startup is sold. Yet in many cases entrepreneurs make mistakes doing their exits, undoing years of effort in a few weeks. What’s worse: they can’t learn from their mistakes, since most only ever do one or two in their career.
I’ll give you an example:
Call him Bruno. Bruno sacrificed everything for a decade and built a company with 200 employees in 4 countries, the best in his market. But he was so heads down building his company he was taken completely by surprise when his two direct competitors were bought by Google and IBM. “This is fantastic for us” Bruno joked, “they’ll be destabilized and we can hire their best talent.” But in the following months, Bruno faced huge sales teams from these giants. Now he wasn’t laughing, and his company wasn’t growing as fast. Scrambling a little, he decided belatedly to do his own ‘exit’ to a larger player so he could compete and win. “Better late than never, it’s only been a few months” he reckoned.
But the market had changed, and buyers offered Bruno 30% less for his business because they were worried how much they would have to invest to compete against these giants, so had to pay less for his business. And a few weeks before the deal closed, the buyer imposed worse terms that Bruno had to accept; he reckoned that cost him another 20% on top of the 30%. For exiting awfully, Bruno ended up with HALF the value he could have gotten 12 months earlier, after investing a decade of his life.
I wish this was exceptional. If you build a great company, buyers will come, right? Sure, and the most qualified person becomes President of the United States, right? Great exits and great companies overlap, but too often they do not. If you build a great company and exit badly you are a smart idiot.
Bruno also assumed it’s harder to do great exits far away from Silicon Valley. It stands to reason that buyers would be more interested in, and pay more for, targets that are only a few miles away down, right?
This narrative makes sense, but it’s an excuse. There are only two key questions that matter. What exactly can entrepreneurs do so they don’t end up like Bruno? And if they do these things is it possible to do a great exit in an emerging hub like Berlin?
The answers are: there is a huge amount that entrepreneurs can do, and it is much easier to do a great exit from a hub like Berlin now than ever before.
So how do you exit well? There are ten commandments you need to follow:
Let’s start with what’s blindly obvious yet is often the biggest mistake. Know what the goal is. This means setting clear parameters for when you seriously consider an exit: “when we get above x size, when our momentum gets more than x, when our market segment gets hotter than x” etc. You won’t be exactly right, but at least you are looking at the road ahead while driving.
Our second commandment: visibility = value. Buyers buy who they know – the further away you are from buyers the more you need to ‘over steer’ to get attention. That means going to see them, more often than you think you should. This also demands spending more on corporate marketing, yet international CEO’s often spend 2/3 less than US peers, when it should be the exact opposite. HOW its spent is important but spending more badly is better than spending less.
Third, you as the company leader need to be a thought leader – it’s far easier than you think. Bruno was so heads down he didn’t even think to do this. Buyers buy expertise and expert commentary quickly gets you on buyers’ radar screens. This means writing about issues which affect your industry, not promoting your product. A CEO who knows banking software can write about the challenges banks face going truly digital, and she and her company will quickly get known as ‘really knowledgeable”, and authority = value. Machiavellian? So what? Over-steer to create the perception of authority.
Fourth, Bruno should have done conscious business development early with the most likely buyers. US companies with only 50 people often have Vice Presidents of Business Development whose job it is to do commercial deals with larger buyers and build relationships. Amazingly, international companies five times that size often don’t, though it should be the exact opposite. Being further away from buyers, it’s an essential exit investment to have someone to build and nurture those relationships not just for next year’s revenue, but for a headline sale down the road. Think of this as an investment, not an expense.
Fifth study the most likely buyers early, learn their problems, and where your company can make a difference. While sometimes buyers buy ‘big future opportunities,’, the vast majority of deals solve a current problem or address a real issue for a large buyer. When Apple had to scramble to catch up in Artificial Intelligence, it bought Siri then opened its check book for more deals. When Amazon needed to stream content, it bought LoveFilm, which I worked with, and that led to Amazon Prime Video. One of our best examples is a small company based next to a wheat field in southern Sweden called C3, which did aerial mapping in 3D. They spent months explaining to Apple’s engineers how challenging it was to calibrate cameras hanging out of the bottom of flying aircraft, but also why it was so essential if you wanted to map the world in 3D. A few months later Apple reportedly paid in the hundreds of millions to buy this company with 20 people and barely any revenue. Whatever the larger company’s problem is, understand it, and explain and show clearly how your company can ‘solve’ this. Might lead to a commercial deal, might well lead to a whole lot more.
Six, stress positives you take for granted. Companies don’t shout about their most obvious assets, precisely because they are so “obvious”. Well, they might not be so clear to your best buyer. These include: a deep understanding of a local market, a great low-cost development team you can’t assemble in Silicon Valley, or a multi-national product the larger US company would take years to build. If YOU take your assets for granted, you’ll never get paid for them.
Let’s say you do the first six really well, now comes seven. Interest from one buyer is flattering, from two incredibly valuable. Competition between buyers gets exits done. Since it takes time to build interest and desire, if you wait till one pops the question, you’ve waited too long. Months before you think a buyer will get serious, re double your efforts with the next best 2-3. Get two direct competitors fired up to buy you, and you are headed for a headline-making exit.
Now our last three quickly.
Be ‘easy to buy.’ The further away a company is from a buyer, the simpler a deal needs to be. Here is just one thing that often crops up. Your biggest customer demands to be able to cancel their contract with you if you sell your company, just for protection. You feel you have no choice, so sign. Two years later the buyer offers you $100m for your business, then reads that cancellation clause and pulls out, worried your customer will terminate. I’ve worked with companies that have dozens of these ticking time bombs. There are a lot of better ways of dealing with such customer demands, but if you aren’t alive to the risks, you may have killed your chance to exit years before you even consider it.
Be wary of raising too much money. I know: everyone celebrates when companies raise large amounts of money, and here is this guy on stage in Berlin saying raise less? The more money you raise the more expensive your company will be, and the fewer buyers who can afford you. Notice how no one is buying most “unicorns” (those private companies valued at $1B or more)? Those companies have raised so much money at such high valuations that they’ve become too expensive to buy. Now, sometimes the only way to build a very large company is raise lots of money, but understand you are giving up a lot of exit flexibility along the way. Most entrepreneurs don’t think enough about the trade-off, and if the company doesn’t end up being worth $1 billion who do you think loses the most? Exactly.
The tenth and final commandment may be most controversial: sell early! This is so counter-intuitive its blasphemy, but it might have been Bruno’s biggest mistake. How could I say you’ll become a success by leaving money on the table, after years of building a business? Truth is we are all terrible at timing markets. For every company that timed the market perfectly, there are dozens who rejected large offers, only for their market to change and slash their value. You all know a few stories here in Berlin. Exiting well means exiting uncomfortably early.
So if you do all this well, can it work from an emerging hub such as Berlin?
It has never been easier. Funding for international companies has grown enormously. In ten years, US investment in startups grew 4x while international investment grew 44x. Today for the first time in history a kid in Berlin or Istanbul can dream, create and fund a business to challenge the giants.
Berlin and Germany have more advantages. Germany has more tech developers and engineering graduates than anywhere in Europe. Where there is so much tech talent, investment money flows and headline exits follow. And Berlin has two crucial ingredients that powered Silicon Valley 50 years ago: cheaper living costs than London and Paris and being in the center of Europe it’s a short hop to sun and mountains. With such great raw material to work with, Berlin’s failure to churn out headline exits is, frankly, shocking.
I want to make a really important point this applies to any emerging hub. I could cut and paste Nairobi or Mumbai for Berlin. Just to prove it let’s take the “last frontier”: Africa. There are more mobile payments, off-grid solar companies and e-commerce companies in East and West Africa selling shares for higher prices today than ever before. We’ve just handled the largest ever fundraise for an African fin-tech company, which already reaches 40m people in 11 countries. Over the next ten years investment and exits will multiply in Nigeria and East Africa. High value exits can happen anywhere. They just need focus and preparation and effort.
Bottom line: the way we all think about startups is just wrong. If you build a company and wait for the phone to ring you are playing roulette with your success. Anyone creating a business can apply a few simple rules and, after a few years of incredible dedication, can dramatically increase their chance of becoming an “overnight success.”
And wherever you are on this earth is a good place to start.
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