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Acquistion or bust A few things to know about exit strategies for startups

on May 17, 2012

When it comes to exit strategies for startups, there are basically two options: get bought, or fail.

That’s according to Hadi Partovi, an angel investor and co-founder of iLike, a social music service that got acquired by MySpace. In this video from Seattle 2.0, he says the likeliness of a startup today becoming a publicly traded, billion-dollar company is not high, and making enough money to stay a private company forever isn’t so common either.

Failure should only be an option in three scenarios, he says – when you run out of money, if your heart isn’t in it, or if you come up with something that’s clearly better. So for most startups, acquisition will be the goal.

“As a CEO, selling your company is your number one job,” Partovi says. It’s important to put effort into getting the company’s name and product out there early, as it’s much easier to sell a company if people already know who you are, he adds.

But the real key to finding an acquirer is to start thinking and researching early. Partovi recommends making a list of potential acquirers and finding ways to get connected with people who work there immediately. Using a third-party acquaintance is a great way to do that and will help when it comes time to talk acquisition, although early relationships with potential acquirers should be started and built on getting to know each other and each other’s businesses.

“Even if basically you just want to get acquired, you can’t say that. The moment you say that, you cheapen yourself,” Partovi says.

When a company reaches a good place to get acquired, and there’s a potential buyer at the table, the acquisition will progress through the following stages: preliminary due diligence (which sounds simple but can take months), a non-binding agreement (basically, the startup can’t talk to anyone else until the acquirer decides if it wants to proceed), full due diligence and a definitive agreement/closing.

An acquisition can change course at any of these stages, so a startup should never get too comfortable or confident. “One of the worst things you can do is get greedy about price,” Partovi says.

Exit Strategies for Startups by Hadi Partovi from Seattle20 on Vimeo.

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