I’m often asked about trying to optimize business strategy for a specific outcome, most often focused on the goal of trying to get acquired before the company runs out of cash.
When it comes to early-stage companies, this desire to optimize for a sales process isn’t often motivated by the desire for a big payday.
One common motivation is that the founder can’t see a path to scaling the company to a broader market without the resources that a larger company can bring. They can’t see an obvious place to invest right now that hits the key milestones that will lead to a successful fundraise in 12 – 18 months.
Another motivation, and one that is harder to solve, is that the founder is mentally exhausted by the struggle of building the company. They are simply looking for an off-ramp. The topic of self-care and founder mental health is a big one and is only now getting some level of attention. I’ll cover this issue quite a bit in the future.
But let’s come back to the risks of trying to optimize for an acquisition.
Regardless of the outcome, the one thing we want to avoid is getting backed into a corner and ending up in a fire sale because we ran out of cash.
Because at the moment you are out of runway, and you have to force a transaction, you have no leverage.
For simplicity’s sake, let’s focus on four possible outcomes for a startup:
- Continue to fundraise until you reach profitability and cash flow positive, at which point you can continue to build the business without the need for external financing
- Sell the company
- IPO
- Run out of cash and go out of business
At the risk of stating the obvious, to avoid bankruptcy, you need to create something that either investors, an acquirer, or the public markets will value.
Each of these processes is essentially a sales process, where increased demand for what you have to offer is going to increase the likelihood of getting a deal done, at a valuation you find attractive. You need to create as competitive a dynamic as possible, whether that’s for potential acquirers, investors or bankers.
Your ability to create optionality helps generate interest and demand. Strong fundraise prospects or a clear path to IPO often spur a sale of the company to an acquirer that doesn’t want to miss the opportunity. Interest from potential acquirers can drive valuation in a fundraise, allowing you to stay independent and invest in further growth.
Your failure to create this optionality, by building value and focusing on the right key milestones, creates the risk of having to settle for a sub-par outcome, or worse.
Which leads back to trying to optimize for an acquisition. The risk is that you are going to try to guess what acquirers value most, and invest in initiatives that amount to window dressing rather than building the fundamentals of the business.
And if an acquisition doesn’t materialize, you’ll find that you haven’t optimized for any other kind of outcome, leaving you with no path forward.
My advice is to focus on building real value. Focus on the critical milestones that demonstrate product-market fit, the path to scale and the path to profitable growth.
At the same time, build relationships with possible future investors, and strategics that someday might be potential acquirers.
It’s a lot to think about. But that’s how you build optionality into your exit strategy, and that’s how you best position yourself for a successful outcome.
