One day you receive an acquisition offer out of the blue. You drop everything to focus on this opportunity. Exclusive due diligence starts. Your company is a mess IP, contracts, burn. Days become weeks; weeks become months.
The buyer says they found a bunch of cockroaches in the walls and drops the price. Now what? This is still a favorable situation: You had an offer! Think about how much time you invested in your various funding rounds. Have you spent even a fraction of that on understanding exit paths?
And most happened before Series B. As a result, founders miss opportunities or leave money on the table. This is a shame. Our fund has more than companies in portfolio. We want the best possible exit for each of them. And fortune favors the prepared! Now, how to get exits and counting? Each one for hundreds of millions. As founders, you build your product, your company and… optionality. You need to understand the options open to your company, and take steps to enable them. Not front and center, but on the agenda.
Is your message and value clear in their eyes? Have you considered an acquisition track in parallel to a fundraise?
The question is thus: how to get bought? It could be from least to most expensive, or as a mix, as listed by Mark Suster , managing partner at Upfront Ventures :. Corporates find deals via the development of partnerships, investment CVC , their business units, corp dev research, media and investor connections.
In other words, business development is corporate development. For IP, they will check your contracts staff and contractors , and run some automated code analysis for proprietary code and open source use. Indeed, in analyzing the boards of privately held ventures, I found that outside investors control the board more often where the CEO is a founder, where the CEO has a background in science or technology rather than in marketing or sales, and where the CEO has on average 13 years of experience.
Thus, the faster that founder-CEOs lead their companies to the point where they need outside funds and new management skills, the quicker they will lose management control. Success makes founders less qualified to lead the company and changes the power structure so they are more vulnerable. Investors wield the most influence over entrepreneurs just before they invest in their companies, often using that moment to force founders to step down.
In other Seven news, the company named former Onebox. One Silicon Valley? In such cases, investors allow founder-CEOs to lead their enterprises longer, since the founder will have to come back for more capital, but at some point outsiders will gain control of the board. Whether gradual or sudden, the transition is often stormy. In , for instance, when a California-based internet telephony company finished developing the first generation of its system, an outside investor pushed for the appointment of a new CEO.
The founder refused to accept the need for a change, and it took five pressure-filled months of persuasion before he would step down. Used to being the heart and soul of their ventures, founders find it hard to accept lesser roles, and their resistance triggers traumatic leadership transitions within young companies.
On the one hand, they have to raise resources in order to capitalize on the opportunities before them. If they choose the right investors, their financial gains will soar.
My research shows that a founder who gives up more equity to attract cofounders, nonfounding hires, and investors builds a more valuable company than one who parts with less equity. The founder ends up with a more valuable slice, too. On the other hand, in order to attract investors and executives, entrepreneurs have to give up control over most decision making.
Choosing money: A founder who gives up more equity to attract investors builds a more valuable company than one who parts with less—and ends up with a more valuable slice, too. Soon, he had several suitors wooing him, including an inexperienced angel investor and a well-known venture capital firm. If he accepted the other offer,though, he would control just two of five seats on the board.
Triandiflou felt that Ockham would grow bigger if he roped in the venture capital firm rather than the angel investor. After much soul-searching, he decided to take a risk, and he sold an equity stake to the venture firm. Similarly, at Wily Technology, a Silicon Valley enterprise software company, founder Lew Cirne gave up control of the board and the company in exchange for financial backing from Greylock Partners and other venture capital firms.
As a result, CA bought Wily two years later for far more money than it would have if Cirne had tried to go it alone. On the other side of the coin are founders who bootstrap their ventures in order to remain in control. Having set up nine stores, he has repeatedly rejected offers of funding that would enable the company to grow faster, fearing that would lead him to lose control.
Most founder-CEOs start out by wanting both wealth and power. Their past decisions regarding cofounders, hires, and investors will usually tell them which they truly favor. Once they know, they will find it easier to tackle transitions.
Founders who understand that they are motivated more by wealth than by control will themselves bring in new CEOs. For example, at one health care—focused internet venture based in California, the founder-CEO held a series of discussions with potential investors, which helped him uncover his own motivations. Such founders are also likely to work with their boards to develop post-succession roles for themselves.
What do boards do with founders after asking them to step down as CEO? Ideally, a board should keep the founder involved in some way, often as a board member, and use his or her relationships and knowledge to help the new CEO succeed.
Many times, keeping the founder on board is easier said than done. Founders can act, sometimes unconsciously, as negative forces. They can resist the changes suggested by new CEOs and encourage their loyalists to leave. Some boards and CEOs try to manage those risks by taking half-measures, relegating the founder to a cosmetic role, but that can backfire.
His successor also wanted Cirne to give up his position as board chairman. Boards can sometimes help founders find new roles. The more concrete value the new CEO adds, the easier it will be for the founder to accept the transition. Founders who want to be CEO for a longer time in their next venture need to learn new skills.
Accordingly, boards can encourage founders to take on new roles in their companies that will enable them to do so. If they do, founders may even become accomplished enough to regain control. By contrast, founders who understand that they are motivated by control are more prone to making decisions that enable them to lead the business at the expense of increasing its value. They are more likely to remain sole founders, to use their own capital instead of taking money from investors, to resist deals that affect their management control, and to attract executives who will not threaten their desire to run the company.
During negotiations with potential investors, he realized that all of them would insist on bringing in a professional CEO. Choosing power: Founders motivated by control will make decisions that enable them to lead the business at the expense of increasing its value. Some venture capitalists implicitly use the trade-off between money and control to judge whether they should invest in founder-led companies. Even these firms, though, have to replace as many as a quarter of the founder-CEOs in the companies they fund.
Rich-or-king choices can also crop up in established companies. One of my favorite examples comes from history. In , Henry Royce was pushed to merge Rolls-Royce with Vickers, a large armaments manufacturer, in order to form a stronger British company. Heads of not-for-profit organizations must make similar choices. I recently consulted with a successful Virginia-based nonprofit whose founder-CEO had faced two coup attempts.
Early on, a hospital executive who felt he was himself more qualified to lead the organization mounted one takeover bid, and some years later, a board member made the other bid when the venture was beginning to attract notice.
The founder realized that if he continued to accept money from outside organizations, he would face more attempts to oust him. Now the question he and his family have to think through is whether to take less money from outside funders even though that means the venture will grow less quickly. Would-be entrepreneurs can also apply the framework to judge the kind of ideas they should pursue.
They may also want to wait until late in their careers before setting up shop, after they have developed broader skills and accumulated some savings. Founders who want to become wealthy should be open to pursuing ideas that require resources. You have 1 free article s left this month. You are reading your last free article for this month. Subscribe for unlimited access. Create an account to read 2 more. Entrepreneurs and founders.
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