SmoothSpan Blog

Whaddya mean you want to sell?

How do you position and maneuver your VC-funded startup for acquisition?

The short answer is, “You can’t.”  

The VC’s didn’t sign up for an acquisition.  They are seeking a billion dollar revenue opportunity because that’s what it takes to move the needle on their portfolio.  If they are willing to talk about an acquisition at all, it is either a totally insane IPO-level valuation, or they have serious deal fatigue and you’d better watch out lest you find yourself walking the “sell-it-before-the-next-round-or-we-shut-the-doors-or-replace-you” plank.  Those sharks below the end of that plank look mighty hungry and the water there is cold.

I’m not going to spend a lot more time trying to convince you of that truth.  I’ve written about it before, and I have lived it more than once.  You may think you’re doing your investors a big favor offering them an early 10x return, but you’re not, so don’t kid yourself.  VC’s are VC’s, they don’t mean anything by it, but they have a job to do and they try hard to be good at it.  Don’t get cross-ways with those gears.

In particular, don’t think you can decide how much money to raise in a way that keeps your options open.  Your options will be determined based on how the VC’s feel about your company’s prospects.  If they’re bullish, they won’t let you sell absent a major hostage terrorist negotiation (been there, done that, do not want any more of those T-shirts).  If they are not bullish, you have much worse problems than deciding to raise a little less money to preserve your options.  Your first problem is you won’t have the luxury of raising less if they aren’t bullish.  At best, they will agree to participate pro-rata if you can find some new sucker to set the price and pony up.  At worst, they don’t go pro-rata and it becomes nearly impossible to raise any money.  I had the joy of trying to operate under those conditions in the wake of the 2008 crash, Sequoia memos, and the rest of the gloom and doom.  One of my VC’s would go pro rata, the other wouldn’t, having already invested in larger competitors.  I walked the plank.

So forget that idea.  It’s a non-starter.  The only way to win is to figure out how to fly faster to the goal, not slower.  And hasn’t that always been true for your startup?

The other reason it is a non-starter is that companies are bought and not sold. Unless you’ve already been in talks that convince you that you have the opportunity to be bought, forget about it until you do have those talks. If you’re thinking you need to preserve the option for talks later, reread the first part of this article where the VC’s are going to decide anyway and then do as follows:

Raise enough to be able to accomplish something in the next 12-18 months that significantly reduces risk and raises the valuation. That aggressive risk-reducing goal you intend to accomplish is central to a good pitch anyway. This is a proposition your Board will understand and can buy into, it is a prudent use of capital, it is a good test of whether everyone is wasting their time (you are if you can’t figure out how to significantly reduce the risk with a defined mission), and it still sets the stage for acquisition talks as the acquirer is acquiring to reduce their own risk, which is almost always the case. If you reduce your risk, it either reduces theirs too or it positions you as closer to the top of the list they could acquire to solve their problem.

Raising less than enough to significantly reduce risk is a sure recipe to show up the next time you need money without having made enough progress. That’s not going to go well at all. See the various excellent posts out there on dilution. Some of those meetings where you need to raise more without having accomplished enough are inevitable, but why set a plan in motion that guarantees it?