I'm planning to write this in three parts:
- Why you might want to sell your startup instead of doing an IPO.
- How to sell your startup - who to target, how to position yourself and how much your company might be worth.
- Mistakes I've made and lessons I've learned in selling 3 startups.
On the other hand, I know quite a few entrepreneurs (me included) who have built and sold multiple startups and achieved modest (but certainly not insignificant) success with each. This kind of repeat success comes from entrepreneurs who build sustainable businesses: businesses that meet a need and generate consistent revenue; businesses where reasonable risks are taken but where you're not betting the company on the next big thing.
So why sell your startup instead of going for an IPO?
You'll have more control over the process. With an IPO, it will be the VCs and investment bankers who decide how, when, and how much you'll make in the IPO. Even the process of getting to the point where your company can go public will be controlled by your investors. They will make management and organizational decisions to present the best face to the public investment market. Your company culture will likely suffer.
Selling is easier than an IPO. The IPO process is complex and takes a lot of time and planning. In addition to all the SEC filings and regulations, you'll be dealing with investment bankers, road shows, and pitches to potential initial purchasers. It's no wonder most companies need a mezzanine round of financing just to fund the IPO.
You will have money in your pocket much sooner. With an IPO, the investors and investment bankers will have registered shares. Founders usually don't. So, you won't be able to touch the monies for a long time. Beyond the initial section 144 holding period, if you own more than 1% of the company after the IPO, you'll be restricted in how much you can sell and when. When you sell your startup to a larger company, it's unlikely that you'll own more than 1% of that larger entity so these restrictions don't apply.
Beyond the financial and logistic considerations, there a quite a few strategic advantages which might encourage you to sell your startup:
Leapfrog your competition. Got a nasty competitor who badmouths your products, invades your loyal customers, or quite frankly is just getting ahead of you? Get acquired by a larger company who can run past your competition simply by including your offerings with theirs.
Enter markets that are out of reach. If your acquirer has a large marketing and sales force, they can get your products/services out there. In addition, they may have entries into specific industry segments like government, healthcare, telecom - customers where the sales cycles are long and expensive and often difficult for a startup to penetrate.
Leverage your technologies. Have some core technologies with potentially many applications but haven't been able to build and sell all possible products? A larger company can integrate your technologies into their products and get your innovations into more areas sooner than you could reasonably achieve.
Of course there are challenges with any acquisition. Your cultures might not match. Your team may not be ready to work with the bureaucracy of a large company. Processes for development and integration in the larger entity might move too slowly for you. But then again, the advantages listed above might outweigh these issues.
We'll discuss how to mitigate the downsides in my next post: Selling Your #startup - Who, How, How Much?
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