Part of the Silicon Valley mythology is the determined founder leading the company to a blockbuster IPO. In fact, startups are 16 times more likely to be acquired.
This is not a conclusion that is often debated.
“It’s one of those things that a lot of people don’t really talk about. In Silicon Valley, we always talk about IPOs,” said Naveen Rao, VP of AI. Databricks and two-time founder, on stage at TechCrunch Disrupt 2024 on Thursday.
This silence can make a difficult process even more difficult for founders. “I’m very happy that it’s being discussed on a panel as a topic, as a real path and a real outcome for founders, rather than the insider secrets of investment bankers.” deal,” said Kamakshi Sivaramakrishnan, head of the Data Clean Room Snowflake And twice founder.
“Acquisitions are statistically more likely than IPOs – arguably more successful in many scenarios than IPOs – and certainly something that founders have to mentally and physically prepare for. It is an endurance journey,” he said.
Rao and Sivaramkrishnan each built and sold two companies: Rao sold Nirvana to Intel; $408 million in 2016 and sold MosaicML to Databricks in 2023 for $1.3 billion. Drawbridge to LinkedIn About $300 million in 2019 and for Snowflake from Samoha $183 million.
Both founders said they didn’t start out with the intention of selling their companies, but when the right deal with the right company came along, it made sense.
“I personally believe that you should build a company and try to make it a real enterprise,” Rao said. “If something gets in the way, great. If you try to set yourself up to sell the company, it’s always going to bend, just like you’re always going to sell. And I think That the result will never be good.
“You hear all these stories about ‘good companies are bought, not sold’ and ‘you just have to keep going and persevere indefinitely,'” Dharmesh Thakur, general partner. Battery Venturestold the audience.
“The reality is, most investors have some success that makes 100x and they pay the fund. The rest of it, whether you make 1x or 0.5x or 2x, it doesn’t matter. We What we try to do is, ‘OK, if things aren’t going to go 50x or 100x, let’s find them a good home early in the cycle,'” he added. “When you $10 million or $20 million, it is much easier to sell the company and still create and complete a win-win situation for the founders and investors. It’s hard when you have to raise millions and then find out things aren’t working out.
To determine when it’s time to soldier on and when it’s time to sell, Thacker analyzes a company using a three-point framework.
First, he analyzes the product: Is it something that customers like and are using? If a company is struggling to gain traction in the market, it may warrant a spin-off, or it may be able to cash out.
Second, he looks at the company’s sales and sales cycle. If the product isn’t moving or it’s difficult for the sales team to close deals, that could be a red flag.
Third, Thakur takes a look at the balance sheet. If money and runways are running low, that’s a pretty clear sign that it might be time to look for a sweater.
“I was fortunate enough to be an investor in MongoDB and Cloudera, Databricks, Confluent, Gong and many others, where every time we had an acquisition offer, we looked at the framework and said, are these three things true?” If the answer was yes, the battery team encouraged the startup to remain independent.
At this point, the founders needed a moment to “refresh” and “revitalize.” “In almost all cases, the end result was much better than selling the company.”
But this is not always the case. If two of the three items in Thakur’s framework are not positive, it is worth revising. Customers may have purchased the product but are not using it. Or maybe it’s a good fit but it’s not selling well. In either case, the company can keep trying, but will burn a lot of cash in the process. “In these cases, you have to be very open-minded, and the sooner you do that, the better,” Thakur said.
When it comes time to sell, Thucker encourages founders to negotiate a deal that’s fair not only to the founders and investors, but also to their employees. “Let’s do the right thing by the employees,” he said. “Often, a big component of an acquisition is a retention package for all employees. And inevitably, if you do it right, many of those employees come back, start one company, and you hire them to another one.” Fund the third time and the second and third times, there are much better results.
Credit : techcrunch.com
