Part of the Silicon Valley myth is its dedicated founders who led their companies to massive IPOs. In fact, startups are 16 times more likely to be acquired.
It's not a result that's often discussed either.
“This is one of the things that a lot of people don't talk about very much. In Silicon Valley, we always talk about IPOs,” said Naveen Rao, vice president of AI and two-time founder of Databricks, at TechCrunch Disrupt 2024 on Thursday. He spoke on stage.
That silence can make a difficult process even more difficult for founders. “I’m so glad this is being talked about as a panel discussion topic, as a real path and a real outcome for founders, rather than the sacred inside secret of investment bankers closing deals.” Kamakshi Siva Mr. Ramakrishnan said. He is the head of Snowflake's data clean room and a two-time founder.
“Acquisitions are statistically more likely than IPOs, and are probably more likely to be successful than IPOs in many scenarios, and founders must prepare themselves to some extent mentally and physically. It's definitely not. It's a journey of patience,” she said.
Mr. Rao and Mr. Sivaramakrishnan each founded and sold two companies. Rao sold Nervana to Intel for $408 million in 2016, and MosaicML to Databricks for $1.3 billion in 2023. In 2019, Sivaramakrishnan sold Drawbridge to LinkedIn for about $300 million and Samooha to Snowflake for $183 million.
Both founders said they didn't start the company with the intention of selling, but when the right company and the right deal struck, it made sense.
“I personally believe that you should start a company and try to make it tangible,” Rao said. “If something happens along the way, that's great. Whenever you try to sell a company, it always ends up swerving in that direction, as if it's always being sold. And the results are never quite like this. I don’t think it will be good.”
“We often hear things like, 'Great companies are bought, not sold,' or 'You just have to keep going and have infinite patience,'” says Dharmesh, general partner at Battery Ventures. Mr. Thacker told the audience.
“The reality is that most investors have a few hits that give them a 100x return and they pay money into the fund. It doesn't really matter. What we try to do is, “Okay, if things don't go up 50 or 100 times, let's find a good place for them early in the cycle,'' he said. added. “If you can raise $10 million or $20 million, it's much easier to sell the company and still create a win-win situation for the founders and investors and get it done. You can raise hundreds of millions. It’s tough when you have to raise money and find out things aren’t going well.”
To determine when to keep trying and when to sell, Thacker uses a three-point framework to analyze companies.
First, he analyzes the product. Is it something that customers like and use? If a company is struggling to gain traction in the market, a change in direction may be warranted, or even worth cashing out.
Next, look at the company's sales and sales cycle. If your product doesn't work or your sales team has difficulty closing deals, that could be a red flag.
Third, Tucker looks at the balance sheet. If you're short on funds and runway, that's a clear signal that it's time to look for suitors.
“I've been fortunate to invest in a number of companies, including MongoDB, Cloudera, Databricks, Confluent, and Gong. Every time we get an acquisition offer, we look at the framework and say, 'These three are true. If the answer was yes, the Battery team encouraged the startup to remain independent.
Sometimes, he added, the founders needed time to “refresh” and “revitalize.” “In almost every case, the end result was much better than selling the company.”
However, this is not always the case. If two of the three items in Tucker's framework aren't positive, it's worth reconsidering. A customer may have purchased a product but not used it. Or maybe it's a good fit but isn't selling well. In either case, the company can continue its efforts, but it will burn up a lot of cash in the process. “You have to be more open-minded in those cases. The sooner you do that, the better the outcome,” Thacker says.
When the time comes to sell, Thacker advises founders to negotiate a deal that's fair to not only founders and investors, but also employees. “Let’s do what’s right for our employees,” he said. “Oftentimes a big part of an acquisition is a retention package for all the employees, and inevitably, if you do it right, a lot of those employees will come back and start the company and do it for a second or third time. You're going to give them money, and the second and third time, you're going to get even better results.”