Know Your Exits: When Your Startup Is Most Likely to Get Acquired

While selling is every founder’s dream, the acquisition process can be a nightmare. It’s long, tedious, and bureaucratic. It can even pull you away from running your business. And in the long run, no acquisition is guaranteed.

Despite the drawbacks, you’re 16 times more likely to be bought than reaching an IPO. So to achieve your lifelong dream of a sale, you need to play the odds in your favor. In other words, you need to know when to sell.

There are several important data points that can help plan your exit. Understand these and you’ll not only know when to sell, but how to go about the sales process. Let’s explore them now.

PS – this assumes you want to sell your startup. To understand why selling at the right time is infinitely better than hoping for an IPO, check out my other blog in this series, “X”.

What Motivates Buyers?

To understand when to sell, you need to know what motivates buyers. Putting yourself in their shoes can shed light on their strategy, and ultimately, give you an edge in negotiations. So let’s first establish what buyers’ goals are.

Typically, acquisitions happen for two reasons:

  1. Strategic: A strategic acquisition aims to increase the buyer’s revenue or help them enter an emerging market quickly. A larger company will see strategic value in absorbing a startup when its technologies, teams, customers, or all of the above prove valuable. When Verizon Acquired AOL, for example, it was interested in AOL’s mobile advertising technology and how it would help grow its revenue and better serve customers.
  1. Financial: Financial buyers are often private equity (PE) firms with the capital and strategies to grow a company and raise its value. Their ultimate goal is to build it to an IPO, sell its share, or sell the company at a higher value in the future. In 2017, for example, Great Hill Partners bought ZoomInfo for $200M and then resold it a year later for $400M to its main competitor DiscoverOrg. Typically, a PE firm will replace the management team, accelerate growth, and then look to sell it again.

Now, you know what motivates buyers, let’s take a look at what makes a startup an attractive prospect.

What are buyers looking for?

Buyers tend to look for three things:

1. Novelty: Hundreds of thousands of startups are created and sold every year. Buyers are spoilt for choice, so to stand a chance of being Acquired, yours needs to stand out, either due to your ARR, technology, or overall proposition. You don’t have to be unique, but you do have to be compelling.

2. Size: Most financial, private equity buyers won’t show interest until a startup has $10M ARR. Even an interested strategic Acquirer may not show interest until the $5M ARR threshold. Size matters because it’s a strong indication of:

o   A healthy and growing customer base.

o   Market experience and success.

o   Proof that the startup’s concept and model work.

o   A higher chance of success in reaching an IPO.

Smaller startups are less attractive to buyers because there is less to financially or strategically gain through acquisition. These startups usually fall under a buyer’s “wait and see” category.

3. Market visibility: Small yet immensely profitable startups can struggle to find interested buyers because so much attention and opportunity is paid to the larger startups. To counter this, ensure your startup’s story is strong enough to get people talking about it.

Since size often correlates with fundraising stages, and fundraising stages influence how easy (or not) it is to sell your startup, let’s take a look at your chances of acquisition at each stage of fundraising.

The best time to sell

This article by Jason Rowley on TechCrunch brilliantly elucidates the correlation between funding stage and probability of an acquisition. Rather than repeat his experiment with my own data, I’m going to draw some conclusions from a very telling graph within the article and present them here.

Graph taken from TechCrunch

At first glance, you might think you’re most likely to be Acquired at Series E. The truth, however, is a little more complicated than that. First of all, few startups ever make it to that round – most have either been Acquired or IPO’d. Those that do, such as the $1.8bn raised by unicorn Carta, are usually financing a vision that’s grown much larger in scope.  

So when is the best time to be Acquired?

Well, there’s not much difference between stages C, D, and E. The cumulative number of startups Acquired at these stages plateaus at around 15-16%. The biggest jumps occur between:

·       Pre-Series A and Series A – around 4%.

·       Series A and Series B – around 2%.

·       Series B and Series C – around 1%.

Based on this data, you’re more likely to be Acquired at Series C than Series B, Series B than Series A, and even more strikingly, Series A than pre-Series A.

These results probably won’t surprise you. Successful funding rounds are typically regarded as proof you have something special to offer. But while it can be tempting to draw lessons from this simple analysis, the chances of you being Acquired come down to your expectations as much as anything else.

Let me explain.

The graph indicates you’re more likely to be Acquired the further you go down the fundraising route. However, you need to put in some serious grind to progress from one stage to the next, with no guaranteed outcomes. And on top of fundraising, you still have a business to run and grow.

A better strategy, one that considers the survival rates of early stage startups as well as the chances of being Acquired or ever reaching an IPO, might be to quit chasing big numbers and accept an offer when it’s on the table.

While it’s true that only 8-9% of startups in this data set ever got Acquired at pre-Series A, 60% don’t ever make it to the next stage. So why not get out when the going is good? You can then focus on new projects, goals, and ambitions, applying what you’ve learned to advance your entrepreneurial career.

So to recap then:

1.     Most startups are Acquired at Stage E, but few make it that far.

2.     You’re more likely to be Acquired the more funding you raise. However, fundraising is tougher in the early stages and can pull focus from running your business – in other words, it’s a risky strategy if an exit is your goal.

3.     An offer at pre-Series A is uncommon yet highly desirable. If it’s on the table at that stage, statistically, you should take it.