March 16, 2023

Planning for successful startup exits

By Babbage

The familiar Dave Matthews song states pretty accurately the most important question that every startup team must address at some point in their journey: “Where are you going?” It’s an easy question to ask, certainly – but not an easy one to answer. 

Let’s start by acknowledging that most startups eventually fail. By some estimates, 20% of startups die within their first year, 50% are gone within five years, and 65% have failed by the 10-year mark. This implies that where the company is going might be out of existence.

Let’s also acknowledge that our attention here is not on lifestyle businesses. These are the private companies that drive the economy, sell us products, and serve that great dish of pasta you’ve been enjoying for the past 20 years. We are, instead, focused here on high-growth, VC-funded startups.

For companies in this niche category, there are really only two major options: You can expect to grow to the point where you can work with investment bankers to go public on an exchange. Or, more likely, you can succeed to the point where you will be acquired by a larger company. 

Let’s examine both options.

The public route is complex, risky, and fraught with so many legal entanglements that a proper treatment here is well beyond our scope. Instead, we offer just a few bits of guidance from our experience having run this route several times in our collective careers as Ballistic principals.

If you intend to go public, you will need to be scrupulous in your financial, legal, and policy management – from the start. It’s difficult to create the proper formal culture to support a public offering if the company has been run in a wild and unconstrained manner. This will not work.

Second, if you are presently considering (or your funding team is considering) a public offering, then expect to have much less control over the process than you would expect. Many founders we’ve supported use “rug-pulled-out-from-under” to describe their feeling as the lawyers take over.

Finally, make sure your offering is done from a position of strength. Too many companies go public in a rush, sometimes using vehicles such as reverse takeovers or SPACs to drive the process more quickly. Anything can work, but it’s never a good idea to use public offering to revive a failed business. 

With all that said, this is the course you must take if you want to build a company that will change the world in a meaningful way and outlive its founders. 

For those of you on the acquisition route, and this is the majority of startups, things are a bit more straightforward, albeit never totally predictable. Your goal is to build value, and this should start with an obsessive focus on solving customer problems. That’s what acquiring entities want: value.

Too many startup founders confuse marketing hype with actual customer value. They rationalize that their goal is to build teams, push out new features, and publish content. While these are important tasks, they sidestep the primary goal, which is always to solve real problems for paying customers.

This implies that if you are building your startup, and you allow yourself the indulgence from time-to-time of pondering a future acquisition, then the best course of action today is to do what you should be doing in any event – and that is building a solid business with happy customers and healthy financials.

This is a tall order, but it’s also why the acquisition rate for startups is poor. A recent study suggests that one in six startups are acquired – with things maxing out after the Series E round of investment. These are tough odds, so you are wise to focus on building a great business. There are no shortcuts. 

As always, let us know what you think – but don’t spend too much time writing to us. We’d rather see you do something today to delight your customers. Regardless of your exit plans, that will always be time well-spent.