I advise a bunch of companies, mostly startups, and some of them are in the middle of negotiating acquisition offers while they are raising money. At some point they’ll have to choose one over the other.
It always happens that way. If your startup isn’t interesting and you haven’t created any value, investors and acquirers don’t have any attention for you. But when you have built something valuable, both groups want your attention at the same time.
That gives a startup leverage. You can use an acquisition offer to drive up your valuation with investors and vice versa. Jason and I had three investors lined up for our first true investment round the same summer we were negotiating our AOL/Weblogs deal.
It’s also a constant headache for startup CEOs because taking that next round of investor money means they just set the bar even higher for their exit. Raising at a $50M valuation means you need an acquisition or IPO in the $200M+ range to be a success.
There are four exit levels I talk about with startup CEOs and I want to share them.
This is the most common! Four out of five new businesses fold in the first couple of years. I advise startup CEOs to aim higher than this level.
2. Acquired by a customer
This is the next level up after failure. If you have a platform that you sell to media companies, then your natural customers are Disney, Time Warner, News Corp, Viacom, Comcast/NBCUniversal and maybe Yahoo and AOL. One step above failure is to almost fail and get bought by just one of your natural customers.
3. Acquired by a competitor
When you see one startup buy another and neither seems to be in distress, you can bet that the smaller one had to choose between raising another round and folding in with a bigger competitor.
“Do I take $5M at a $20M post-money valuation and move my minimum exit past $50M or trade my company in for $20M in stock from an adjacent startup? Combined we are more likely to become a bigger acquisition target or become a self-sustaining business. I’m not sure I can build a $50M company on my own…”
4. IPO/sustainable business
This is the rarest of all exits. It’s hard to become a self-sustaining independent brand and still give your investors an exit multiple. Zappos figured out how to do that by joining Amazon. Investors got paid back and Zappos has remained independent. Renaming them “Amazon Shoes” would destroy most of the Zappos brand value. WordPress was able to raise $50M recently and reports said it was used to buy out early investors. That doesn’t happen often.
Note that these levels do not have discrete dollar amount ranges. You can get bought by a customer for $50M and your investors will consider that a win if your last valuation was under $20M. And you can be acquired by a competitor for $7M after raising $26.3M.
Strategically though, each of these levels is harder to reach than the one before it and reaching the next level will often mean a happier outcome.