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Part of Silicon Valley’s mythology is the committed founder who leads the company to a massive initial public offering. In fact, startups are 16 times more likely to be acquired.
It’s not an outcome that’s frequently discussed either.
“It’s one of those things that a lot of people don’t really talk about. We always talk about IPOs,” said Naveen Rao, vice president of artificial intelligence at the Silicon Valley company. Data bricks and two-time founder, on stage at TechCrunch Disrupt 2024 on Thursday.
This silence can make the arduous process more difficult for founders. “I’m very happy that this is being talked about as a topic on a committee, and as a real path and a real outcome for founders, rather than the sacred inner secrets of investment bankers doing a deal,” Kamakshi Sivaramakrishnan said. Head of clean data rooms at Snowflake Founder twice.
“Acquisitions are statistically more likely than IPOs — and arguably more successful in many scenarios than IPOs — and certainly something founders have to prepare for mentally and physically. It’s an endurance journey,” she said.
Rao and Sivaramakrishnan built and sold two companies: Rao sold Nervana to Intel for two $408 million in 2016 and MosaicML to Databricks for $1.3 billion in 2023. Sivaramakrishnan sold Drawbridge to LinkedIn For about $300 million in 2019, and from Smouha to Snowflake for $183 million.
Both founders said they didn’t start their companies with the goal of selling them, but when they struck the right deal with the right company, it made sense.
“I personally think you should build a company and try to turn it into a real entity,” Rao said. “If something comes along the way, that’s great. If you try to set yourself up to sell the company, it’s always going to be skewed that way, like you’re always up for sale. And I think the outcome will never be good.”
“You hear all these stories about ‘good companies are bought, not sold,’ and ‘you have to keep grinding and have endless perseverance,’” says Dharmesh Thakur, general partner at the firm. Battery projectshe told the audience.
“The reality is that most investors have a few that do 100x and pay the fund. As for the rest, whether you do 1x, 0.5x or 2x, it doesn’t really matter,” he added. “What we try to do is say: ‘Okay, so “Things weren’t going to be 50 or 100 times, ‘Let’s find them a good home early in the cycle.'” “It’s much easier to sell a company when you’ve raised $10 million or $20 million and you can still achieve a win-win situation for the founders and investors and get it done. “It’s hard when you have to raise hundreds of millions and then you find out things aren’t going well.”
To determine when it’s time to serve and when it’s time to sell, Thacker analyzes the company using a three-point framework.
First, it analyzes the product: Is it something customers like and use? If a company is struggling to gain traction in the market, it may be a justification for a shift, or it may be worth cashing out.
Second, it looks at the sales and sales cycle of the company. If the product isn’t moving or if it’s difficult for the sales team to complete deals, that could be a red flag.
Third, Thacker takes a look at the balance sheet. If you’re running out of money and runway, it’s a clear indication that it may be time to look for a suitor.
“I’ve been fortunate to be an investor in MongoDB, Cloudera, Databricks, Confluent, Gong and many others, where every time we had an acquisition offer, we looked at the framework and said: Are these three things right?” If yes, then the battery team encouraged the startup to remain independent.
He added that sometimes, the founders needed a moment to “refresh” and “refresh.” “In almost all cases, the end result was much better than selling the company.”
But this is not always the case. If two of the three elements in Thacker’s framework are not positive, it is worth reconsidering. Customers may have bought the product but are not using it. Or maybe it’s relevant but doesn’t sell well. Either way, the company can keep trying, but it will burn a lot of money in the process. “In those cases, you have to be more open, and the earlier you do that, the better off you’ll be,” Thacker said.
When it’s time to sell, Thacker encourages founders to negotiate a fair deal not only for the founders and investors, but for their employees as well. “Let’s do what’s right by the employees,” he said. “Often, one of the big elements of an acquisition is a retention package for all the employees. And inevitably, if you do it right, a lot of those employees come back, start a company, and you fund them a second and third time. And the second and third time, there was Much better results.
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