Every startup founder I've met starts with a huge dream of some kind. Some want to change the world, others want a huge exit and a red Ferrari. But understanding how your startup might change the world could be easier to understand than navigating your exit options in this current market.
What are the Best Possible Outcomes for a startup? I hear a lot of early pitches that include an exit strategy as an acquisition by some large company. What the founder doesn't know, however, is that often the companies they name seldom do acquisition in their specific market -- so make sure the companies you are targeting actually do acquisitions. One of the resources is the list of all Google acquisitions, with prices when disclosed. Just because you want to sell to Google doesn't mean they want to buy you.
Here are some of your "outcome" options with a few pros and cons.
1. Selling to a bigger company.
For Cash - the most predictable outcome in the sale process is a cash sale. I've always liked cash.
For Stock - many buyers use stock as all or part of the purchase for multiple reasons. It allows them to leverage their balance sheet and potentially keep cash for other growth initiatives. Keep in mind, if the stock is public you'll likely have a lockup period of some kind. If the stock is private, you may not have a path to liquidity.
For the Earn Out - this is usually tied to performance clauses that need to be met before you get your subsequent cash from the deal. Make sure you have enough influence on the outcomes - e.g. does your department doesn't get the necessary budget for growth, you could get a less then expected return. Also, you'll need to "be present to win" and complete your time commitment to the company. Different types of buyers will value your company differently as well. For example, financial buyers, like private equity firms, are going to look at the ability of the company to generate cash. Most are great financial engineers and will be better then calculating the value then you will be. Strategic buyers, however, are looking to put your product into their channel to drive revenues. Or your product may shorten their sales process and provide great value - make sure you price your deal accordingly.
2. Going Public - This requires that your company is ready before really considering this option. You'll likely need to be on a trajectory of $100M or more in revenues and have predictable revenues as well as GAAP compliant accounting. We've seen the public market punish companies that didn't abide by these expectations - Groupon is one example. You'll spend about $1M a year in compliance to be public. Yes, you can do it cheaper, but if that's a big chunk of your profit, you should likely stay private.
3. Creating cash in the form of dividends for shareholders (even if there are only a small number of shareholders) - Creating net income and cash is a great option for businesses with a small shareholder base or those that didn't take a great deal of outside investment.
The less than 'Best Possible' outcomes...
1. Merger of Peers - seldom do two under-performers match up well. Underperforming is usually a customer acquisition issue - acquiring customers at reasonable economics.
2. Reverse Merger & PIPE - there are a number of bankers out in the market selling the idea of taking your company and doing a reverse merger into a public company shell company then going out and raising a round of funding through a Private Investment in Public Equity - remember the old adage, "if it looks too good to be true it probably is", I'd suggest you run away from this option. I've had friends take their companies through it and it's never turned out well.
3. Acquihires - when a larger company acquires for your team, but not the customer value that you've created. This happens in Seattle as Amazon looks to acquire teams. It's likely a good outcome for the team, but seldom great for the investors.
Which exit is best? That depends on you. Keep in mind that as soon as you take outside shareholders, the best outcome is no longer just about you. But regardless of the final exit option, you need to start by focusing on creating customer value and profitable growth. Focus on building a great company, not on the exit.