The most consistent feedback we receive from founders and startups during the diligence stage is that they’re surprised we “ask totally different questions than most venture firms.” The reality is, in a lot of ways we are also looking for different answers. One such area is what normally comes toward the end of our initial call – “why are you building this business?”
You can visually see their auto pilot light kick on.
This is a very loaded question – primarily because it’s being asked by a potential venture investor. VCs don’t just want big exits, they need them. As such, founders are preconditioned to aim for the moon in their response – anything less than the next Facebook or Uber is unacceptable, to most. This means $1B+ valuations and, for the math to work out at that scale, very likely an IPO.
I literally just wrote an article for Fast Co. (which means it will go live sometime in the next 2 months – so frustrating) on the economics and probability behind an eventual IPO outcome. I won’t completely regurgitate that (if you want notifications when our new content goes live, please sign up right below this article) completely but the long and short of it states that it’s currently damned near impossible. That will improve again with time and with the inevitable revolution that AI has heralded, but still, most companies are solving problems that are part of a whole. This doesn’t mean these problems are not acute or not worth solving. What it does mean is that an acquisition is far more likely, and frankly in the better interest of all involved parties.
I mention this ‘in queue’ article as anytime I put out a new piece of content, I like to do an ‘oh shit’ double check – i.e. did I miss a data point that makes this really wrong, or incomplete, or did someone else just say something way too similar. With everyone and their brother writing content these days it’s hard to stay on top of everything. As such, here I was Googling away when this latest post from SaaStr popped up in my feed. I really like what Jason has built at SaaStr, it’s incredible – and also a really trusted source of truth and best practices for a lot of startups. But this post made me laugh.
If you take a read through and even watch the linked podcast with Jason and Harry Stebbings, two things stood out in a big way for me.
First, the information is a bit contradictory. Jason’s post analyzes a bunch of Carta data, which is incredibly inaccurate when it comes to private transactions btw, and as a result concludes that inside of their first 5 years, only 1 – 1.5% of startups have ‘successful’ acquisition exists (meaning everyone made money). But then in the linked podcast Jason states that if you’re growing rapidly, have a low burn, and you’re retaining and expanding customer relationships, and happen to get an offer from a strategic acquirer, take it! I absolutely agree with the 2nd point but its positioned right after a bunch of analysis that states this is incredibly rare. That’s the first thing that stood out.
The second is ‘why?’ Why is this seemingly so rare? For the answer, you need only to revert to how I opened this post – because NO ONE IS AIMING FOR IT.
Still, organizations hit things they’re not aiming for all the time, which of course is why this still does happen. However, the BIG reason early acquisitions aren’t more prevalent is BURN. If you’re stated goal is to go to the moon – and your investors require that you go to the moon, just so they can offset the losses precipitated by all the other investments that will make the attempt and never got there – then you’re going to operate like you’re going to the moon. In startup terms you’re going to pay out the ass for revenues with the end justifying the means. Burn. Burn. Burn. And when you can’t burn any longer, get someone to give you more fuel. Don’t let all the talk around ‘efficient growth’ fool you – in the macro venture capital space the fundamental playbook hasn’t changed one bit. That’s because hyper-growth is inherent, and in fact synonymous, with success in tech startups. They may want you to always maintain a 24-mo. runway, but they still expect the same type of growth as pre-2022 despite that new shackle.
Until the model changes – the results will stay the same.
If more investors were interested in uncovering the true best path for each of their portfolio companies and worked with founders to apply a bespoke growth strategy that provides optionality, rather than a single definition if success, those early acquisition figures would increase, significantly. (Healthy growth) + (the achievement of, or a path to, profitability) + (fanatical customers). Oh, and multiply that by the creation of a thriving partner ecosystem. That’s what equates to a successful acquisition. And it’s far more achievable, even in the early stages of a company, than Carta’s figures show.
All we have to do is turn off auto-pilot and navigate based on reality.
