When, why, and how to sell your startupFeatured
Hi Elpha!This is my story on why and how I sold my small startup Opearlo. It was by no means a big exit, not in the millions, but it was still something, especially considering we had been going for just four years and were operating in the very nascent industry that is Voice (the world of smart assistants, namely Amazon Alexa and Google Home). The process was a steep learning curve, and one that isn’t often talked about. I hope you gain a few useful insights from reading this article!Reasons you might want to sellFor a small company, we were doing pretty well in the voice industry, and still had a year’s runway, which made the decision harder as there were no external factors to force our hand. On the positive side of things, I loved being co-founder and CEO and the freedom it gave me to work how I wanted. I loved the empowering feeling that comes with making important decisions, building something from the ground up that reached millions of people, the experiences it afforded me, and doing something ‘different’. Over the years my co-founder position became part of my identity, which I enjoyed. But I’d always had an inkling that Opearlo was a stepping stone, not a life-long project. Whenever I was worried about making the wrong decision, I always came back to what motivates me, which I know is working on a ‘meaningful’ product that touches millions of people. What each individual classifies as ‘meaningful’ is very personal, and there are also plenty of people I know that don’t need to find ‘meaning’ in their job to find it enjoyable and motivating. But building games and productivity skills didn’t align with what I wanted. I don’t really play games in real life and I actively dislike productivity tools, so being CEO of a company that built both just wasn’t a good fit for me long term. In the beginning, this didn’t matter, as I was learning so much and having so many new experiences, but four years later, those were no longer enough and it was time to move on.I was really fortunate that my co-founder and I were on the same page. After taking a summer off and working part-time, we both came to this realisation. This was extremely lucky and definitely helped with the process. Actively deciding to wind down the company whether we sold or not was quite liberating, it gave us a sense of “well we might as well try and sell, what have we got to lose?” At least we’ll learn something along the way. Once that decision was made, I became super motivated to get the ‘happy startup ending’ and the exit story entrepreneurs wish for. As I started speaking to other founders about this, I heard about their experiences and why they decided to stop. One of the most surprising realisations I had was that companies often get acquired because their company is heading for bankruptcy, not in spite of it. This gave me a confidence boost for the moments I thought that we were crazy trying to sell something that in our eyes was ‘done’. In summary, there were some of the most frequent reasons to sell that I came across:-People stop believing in what they are doing, and lose motivation-Company runs out of money -Sometimes founders just want a ‘normal’ job, with teammates, good pay, and benefits-Recognition of the fact the company is in ‘no man’s land’ -You are doing so well that you get approached for salePeople won't come knocking at your door (unless they already have)It’s super awkward at first, but you have to actually tell people you are looking to sell. For me this was the biggest hurdle to get over, I found it took a lot of courage and self-pep talks to get the message out there. But like most things in life the reality is never as bad as you imagine it. What is a big deal for you is just another meeting for someone else. Deciding who to try and sell toGenerally speaking, my opinion would be that people buy companies for one or more of these three reasons:-The team -The IP (this could be your tech, or any patents or licenses you hold)-The customer base and/or revenue For us, we had a large customer base across our voice apps, which was a unique selling point because marketing on voice apps is almost non existent, so it’s very difficult to acquire customers.Like writing your own CV, it can be difficult at first to understand what is valuable to someone else. I found it useful to talk to friends and family to get an outsider’s perspective. Think about the assets you have, even a long GDPR-compliant segmented email list is something.Once you have some of your key selling points, it’s time to think about the companies you might approach. From my limited experience, I would say you’d want to come up with a list that included a mix of competitors, enterprises, and scale-ups. Think big as well, we had several meetings with Apple because we thought they might value our experience in Voice, and I had noticed they were advertising roles in the industry. It may have worked out if our team had been bigger, but even so, this probably would have turned into an “aqua-hire” (when the acquiring company pays salaries of the new team + a sign on bonus), which wouldn’t have worked as I wasn’t sure I wanted to stay in the industry.Some ideas of the types of companies you might approach: -a company with a complementing product that wants to add to their portfolio-one of your competitors that wants to gain more market share (this was us)-an enterprise company that wants your tech-a company in an adjacent industry that wants to make moves in yours-a company in your industry that has just raised money, is scaling up, and needs to hire fast, think how much hiring 25 people costs in time and money vs. getting a ready made high functioning team in one swoop-a scale up/start up that would be interested in your licenses or patentsHow to reach out The company we eventually sold our assets to was one of our competitors, a small company based in the US that was looking to expand its portfolio of apps. I first reached out to them six months before we signed the deal in person at a conference. For people on the list that I knew personally, I set up a call, gave the pitch, and only after did I send them the deck.For second or third degree connections, I asked some trusted contacts to spread the word, or even if they knew anyone that would be interested. The response was always positive and I got a good few leads from people paying it forward.For companies where I had to reach out cold, I usually wrote a quick message on Linked in. Here’s an example to an in-house Apple recruiter, who eventually connected me to an Apple executive.Hi XXX, how are you? Opearlo is an award winning YC backed startup: we are looking to sell, and was wondering if there could be an opportunity at Apple with Siri? We've built some of the top Apps on Alexa, and are subject matter experts in the industry. Based in London right now.Selling is like fundraisingWhich is good news if you’ve had raised money before, as you’ll already have had some practice. The selling process should be approached with the same prep, rigour, and thick skin as you would fundraising.Think about your pitch. Write a deck. How will you frame the sale? Why are you choosing to sell? What value will you, your tech, and your customers offer to the prospective buyer. Prepare your data. If the prospect is interested, you will have to lay bare all your confidential information for them to analyze and dissect (we signed mutual NDAs). If you’ve raised money before you know what they will be looking for, and even if you haven’t, it’ll most likely be your core metrics: monthly active users, revenue, retention, etc.Keep track of when and who you’ve spoken to, and also anything that came out of the conversation that you could use in your next pitch.Try to force a "no" if you think it's not going anywhere.Like fundraising, it can be quite tiring and de-motivating. But remember this is to be expected and is 100% part of the process.Whereas in fundraising mode I could easily speak passionately and confidently about the future of the company, in selling mode, it was much more difficult to sound optimistic and persuasive, as I was essentially trying to sell something I no longer wanted to do. Some analogies I found useful to help with this where: -It's like selling a house or a piece of furniture, just because you don’t want it doesn’t mean it won’t be valuable to someone else,-Like finding a job, a lot of it is about timing, right place, and right time. The same can be said for your selling process; there is someone out there, you just haven’t found them yet.-I had a short bullet list of the company’s key accomplishments which I read through before each call to remind myself.Setting the price!After the pitch and a bit of back and forth, we told anyone interested that it would be good if they could send us an offer by a certain date. I can only speak from experience and there might be other ways of doing this, but my co-founder and I pre-agreed on a minimum price we were comfortable with and then let the buyer put in an offer. We got two offers in the end which was lucky. Some other things to consider:-How much money have you raised? Remember, any extra cash will go to the investors first, so work out how the minimum price for you to be able to actually see some money-If the buyer doesn't have lots of cash, is there an equity/cash split you could do with a buy back deal later on?-Go back to the three reasons why people buy companies. How many of those do you have? -Are you making revenue? If the competitor was to buy your company, how much revenue would they make in the next one to five years if the company continues to grow?From speaking to other people I heard that a general rule of thumb was that companies sell for x4-5 their revenue if they are service based, and x10 their revenue if they are product based. Again, this is just what I heard on the grapevine. I’m not sure if it’s true, but it could help guide you in pricing.When to tell your investorsOur investors were Y-combinator and just one other angel investor. We were transparent with YC from the start and emailed our old mentor. It was sort of a “good luck” and “well done” if you can manage it. For the other angel investor we left it a bit too late, we hadn't spoken to them in around three years and they were hard to track down. By the time we did get a response, they only had a couple of weeks before they had to sign the release documents. This was stressful, as we had to catch them up on our 6 month journey in a couple of 30 minute calls. In the end, to be ‘released’ from our investment contract with them, we had to give their money back. It was lucky they had given us a relatively small cheque and we had enough to cover it in the bank, otherwise I think the sale may have fallen through at this point as its monetary outcome wouldn’t have been worth our while.Finding a lawyerIn the beginning, I had no idea there were so many different ways to structure a sale. Ours ending up being an asset sale, because my co-founder and I were not going to join the acquiring company. These nuances I learnt from setting up short introductory calls with a variety of law firms. But I found it really hard to get a detailed quote, as there was a lot of ‘it depends’, and ambiguity about when ‘charged time’ had started. One company sent me an invoice after we met with them for the first time, even though I had previously been assured that this introductory chat would not be charged. Unfortunately, for the size of our deal, most of the quotes we did get would not have made the sale worth it. Changing tact, I went to Upwork where we had a historical success of hiring talented freelancers. Turns out we found our lawyer on Upwork for a fraction of the price of what the law firms were charging. Also the advantage of doing it this way was that we had pre-agreed fixed price milestones and an hourly rate should extra work be required, which meant I was able to accurately estimate the costs. The processJust because a sale is agreed over email it doesn’t mean it will go through. Next begins the due diligence of the buyer’s legal team. It’s actually not so bad for small companies, especially if you have all your legal documents to hand. But our buyer’s legal team did make a few requests that we had to push back on. In retrospect I’m really glad we did pushback, but at the time we just felt lucky to get a sale, so the thought of saying no to some of the requests was very nerve racking, especially when they took days to respond. I would say the thread that kept things moving along was our relationship with the buyer, we had known each other for a while, and so both sides made a lot of effort to keep things professional and diplomatic.Making some noiseSeven months after starting the process, we finally signed on the dotted line. I really wanted for the sale to be covered on the industry’s news sites, an article to refer back to in the future to remind ourselves that this really did happen. Our buyer was also keen to get a bit of coverage, so in the run up to the sale, I let a voice reporter friend know about the deal and asked if he would cover the announcement. Both us and the buyer prepared separate LinkedIn or Medium articles, which we shared with a link to the piece when it went live.Fast forward a year, and I’m now working as Growth Product Manager for a scale-up in the fintech space, building a product that is genuinely helping people become financially better off and more independent and worry free as a result. I’m not opposed to founding another company, but for now I’m motivated, and learning lots. Plus, I first need to have the idea!If you’d like to continue the conversation and ask me follow up questions about something on the topic of startups or selling, feel free to reach out to me on Twitter @Jess_P_Williams.