Thinking about selling your startup? It’s a good time to consider it, as startup-acquisition activity recently hit record highs.
In one of the most buzzed-about deals of early 2022, Brooklyn software engineer Josh Wardle sold Wordle, his free online game, to The New York Times for a reported low 7-figures. He’d just launched the game four months earlier.
To learn more about how founders successfully sell early-stage startups, we talked to four insiders with varied experience:
- An experienced attorney in mergers and acquisitions
- A startup buyer
- A venture-fund manager who’s an expert in early exits
- A business-sale consultant
Their tips will save you time and effort as you look to sell your startup. Before we dig in, let’s start with a quick definition.
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What is a startup acquisition?
Simply put, a startup acquisition is a deal in which a young company is sold to a new owner. Usually (though not always), a bigger, more successful company purchases a smaller startup.
The acquirer might pay cash for the startup — or, if the startup has private or public shares of stock, the big company buys all the startup’s shares to assume ownership.
How do startup acquisitions work?
Startup acquisitions work much like sales of more established businesses, though it can be more challenging to attract buyers without a long sales track record.
Here’s a quick walk-through on the steps to a sale, from business consultant Bob Greisman, managing director of RKG Business Growth Consulting in Chicago:
- Get mentally ready to part with your baby
- Organize the business internally for sale, with documented systems and processes
- Identify potential buyers
- Solicit offers
- Review offers
- Negotiate
- Close a deal and sell your startup
We also offer a more detailed, step-by-step guide to selling your startup.
For many startup founders, the hardest part is finding a buyer – the right buyer, who sees as much value in the business as you do.
The secret is to build trust by cultivating possible buyers early, said Mark Achler, managing director at MATH Venture Partners in Chicago and co-author of the new book, “Exit Right: How to Sell Your Startup, Maximize Your Return, and Build Your Legacy.” His research interviewing dozens of tech acquisition executives showed all favored a pre-existing relationship with a startup before making an offer.
“You want to find a strategic buyer who cares about your IP, or you plug a hole in their product offering,” he said. “Ask them about their strategic direction. Then, you can make adjustments to your business to be the type of acquisition they want.”
Most startup buyers look for two things in a startup: useful intellectual property, and a highly knowledgeable team. Startup sale deals tend to revolve around one or the other.
Startup acquisitions for IP
Simply put, your intellectual property is your work product, or “the ideas and concepts that underpin your startup,” according to UpCounsel’s guide to IP. Sometimes that’s protected with trademarks and copyrights, but if you’ve created something valuable that people pay for, you likely have IP regardless of whether you’ve legally protected it yet.
The paperwork on IP deals can be complex, notes Matt Eckert, co-chair of the emerging companies group at Polsinelli PC in Boston. Often, buyers worry about possible post-sale copyright infringement claims and want the seller to indemnify them against future claims. Eckert advises sellers to resist.
“You want to try to make it an ‘as-is’ sale,” he notes. “If you get caught up in an infringement lawsuit later, you’ll see your sale money evaporate pretty quickly.”
When the team is the asset (acquihire)
On the other hand, if the buyer is primarily interested in the team, the deal will focus on retaining talent. This type of acquisition is often called an acquihire.
“The buyer is usually someone you know, a commercial partner you’re working with,” Eckert said. “Then, they conclude, ‘We like working with you — and we’d like it even better if you worked for us.’”
In today’s tight hiring market, acquihires are a popular way for big companies to bring on an integrated team of top talent. Deal terms can be simple: cash for founders, and employment contracts for your team. Eckert said he’s even done two-page agreements for acquihire sales.
One example we’ve written about at They Got Acquired is Edge Funder, an AI fintech platform. It was sold via acquihire before the founders brought it to market.
Who buys startups, especially if they have little to no revenue?
What sorts of buyers are interested in a startup acquisition? If it’s not a major competitor, you’re looking for a visionary with money. These buyers typically have an appetite for risk, and believe they can spot growth opportunities others may not.
That’s the outlook of business-turnaround expert Tom Nault, managing partner at Middlerock Partners in Rogersville, Mo. A serial entrepreneur-turned-investor, Nault prides himself on finding troubled startups where his skills will improve performance.
When he bought the Bluetooth-software startup Open Interface in 2004, for instance, the Seattle company was just completing its product — and Bluetooth was not yet well-established. The startup was out of money and about to close down, he said.
“I bought on the strength of the engineering team,” he said. “They had this cohesive team that could do anything. I was willing to bet they could get out of the hole they were in. But I could see they needed to be repackaged.”
Under Nault’s guidance, Open Interface was able to rebound, find major customers, and sell to Qualcomm in 2008 for an undisclosed sum.
How much do startups get acquired for?
Since most startups are young companies with few hard numbers to show buyers, they tend to be valued based on their perceived potential to generate future profits, said consultant Bob Greisman. Your best hope of getting a strong sale price for your startup is to drum up more than one interested buyer to create a bidding war.
The price is determined by the value of your team or solution to the buyer. Does the acquisition save them time and money building their own version of your solution, or hiring a recruiter to find a crack developer team? If so, that could be highly valuable.
“Your business may not be worth $2 million,” said attorney Eckert, “but to the right buyer, being able to lock up your team for three years is worth $2 million.”
How do I get my startup acquired?
Now that you understand the fundamentals of startup acquisitions, you can apply this information to your own startup to find a buyer. Do you have a stellar team that a bigger competitor might want? Or a valuable piece of IP that would help a competitor gain a strategic advantage?
If so, follow our experts’ steps above. Talk early and often with potential acquirers in your industry, to help position your startup for future sale.
If you can’t interest a competitor and find yourself running out of cash and unable or not interested in raising investor money, consider whether you could find an entrepreneurial buyer that sees your business’s potential. The right startup acquisition can put cash in your pocket and free you to move on to your next endeavor.
