Most founders dream about the day their company is bought, even if they swear on a stack of startup event lanyards that they don’t. Even with the best knowledge, in the best of times, it’s tough to reach a successful exit. CB Insights research finds that 70% of upstart tech companies fail — usually around 20 months after first raising financing.
We want to help startups beat those odds.
Tales of successful exits are the favorite campfire stories for future and former founder alike. We get it. Our team is made up of several former and current entrepreneurs, as well as VC savants. We asked Senior Director of Global Operations (and former founder) Nik Adhia, JD Weinstein, whose VC experience helps him understand some of the fundraising and expectation-setting challenges, and program VP, entrepreneur, and author Jason Williamson for their take on what leads to a successful sale. We learned that a successful exit is all about the groundwork.
It might seem premature, but you need to talk through what happens when a buyer shows up long before that happens. Here’s why: buyers, partners, and customers want assurance that a sale won’t cause transition issues. In some cases, a buyer will require founders to remain for a certain period to smooth that transition. In other words, don’t expect to pack your bags for the lengthy beach sabbatical financed by the proceeds of the sale the day after it closes.
“When we had an offer, I discovered I wasn’t on the same page as my cofounder, and that led to some challenging conversations which we had to work through,’’ Adhia says. Everything did get smoothed out at the end, but the lack of transparency up front caused unnecessary snags.
JD Weinstein agrees, “Nik really hit on a key point about aligning incentives with all stakeholders.’’ JD leads venture capital relationships for Oracle for Startups and was previously a principal with WPP. “[Transparency] starts with cofounders and employees, extends to investors, early customers, and partners.”
One approach to ensure alignment is to get to know a potential cofounder before formalizing the startup. “It’s a little bit like dating,’’ Adhia says.
When you’ve had early success, it’s easy to think the best approach is to scale by raising larger funding rounds. Weinstein says that’s not always the best move for the business. With subsequent funding comes new expectations from capital partners, including how high a company needs to be valued at for an attractive exit. A deal that would be perfect after one round might get nixed by the funders of later rounds because their incentives aren't aligned.
“You don’t need to raise hundreds of millions of dollars to build a company of great value. Some of the most successful exits, especially for founders and employees, come from startups with little to no funding. Ideally, raise money when you see tremendous growth opportunity and a reason to scale,” Weinstein says.
He suggests that founders explore different financing options, like using customers or partners as investors, or pursuing revenue-based fundraising, where you pay a percentage of future revenues in exchange for investment, thereby retaining more control of your company.
You can’t always be fully transparent, but you can certainly get in the habit of regular, robust communication. Adhia suggests avoiding the construction of silos as the company grows. Weinstein suggests a weekly or monthly report to everyone on the team (plus critical partners and investors.) Williamson’s dedication to communications saved the day when the company he co-founded in the early aughts ran out of money.
He and his partner had made clear, honest, in-person communication a key part of their culture. They told the construction CRM company’s small staff that they were 30 days away from running out of cash. “You have a couple of choices; you can go find another job, or you can stay, and my partner and I will do best we can do to make you whole, but we can’t pay you.”
No one left.
The founders had a happy ending. They found an investor who was glad to make the employees whole. Williamson says the lesson is “don’t pretend, and don’t exaggerate.’’
Have those difficult conversations about company direction, product portfolio, and financing, early and often with all the key players.Align founders and key employees around key messages continually.
Be as transparent as possible with those outside the inner circles. Defections of critical technical, sales, or customer-facing staff because of secrecy and confusion can be a death blow.
“Get into a regular groove, sending stakeholder updates and team emails at least monthly. Here are all things going on, here are the red flags, let’s make sure all on the same page,’’ Weinstein says.
Priya Shah, one of the founders of Sauce Video, a startup that was acquired by Oracle earlier this year, says consistent communication is recommended, although it isn’t always smooth. “We’ve always been a close-knit team and worked together in the same office for years. But being so tight with your cofounders can also lead to heated debates. But mainly because we’re all so passionate about our business.’’
If you are a founder or prospective founder of a business that will need processing or data support that the cloud is so well-positioned to provide, don’t assume your first thought cloud vendor is the best and only option.
Think through your choices carefully. Max Dunhill, Oracle for Startups’ EMEA business development lead, learned that the hard way. Dunhill built a mentor/college connection business that used Natural Language Processing to match students to the right colleges and mentors to help them get accepted.
He chose a cloud provider that offered what looked like a great price, and bought a big chunk upfront, figuring that would save him money. As for security, it seemed like an issue that could be handled as the business grew. Who would want to hack his tiny, fledgling business anyway?
As it turned out, someone did. While the business did grow, and he received multiple opportunities to sell it, Dunhill ended up spending time fixing security breaches and scrambling to redo his budget after the cloud purchase turned out to be way more expensive than planned.
“I was thinking, ‘it’s the cloud, how expensive can a resource be if I don’t fully utilize it? I’ll buy this chunk so that I don’t have to worry about upgrading the server when traffic picks up. The reason I don’t see any prices quoted is because I’ll only be billed for what I use. At the end of that billing cycle, I found out that assumption was very, very wrong. I paid for what I didn’t use, and my cloud bill was 4x what I had budgeted for.’’
We’re passionate about helping startups avoid the kinds of hurdles Dunhill faced. On Oracle Cloud, startups experience the same security features that enterprise customers get, along with transparent pricing, and flexibility.
Because at the end of the day, we want the Niks, Jasons, JDs, Priyas, and Maxes of the world the succeed! Explore the benefits of Oracle for Startups.