Part of the mythology of Silicon Valley is the committed founder driving the company to a blockbuster IPO. In reality, startups are 16 times more likely to get acquired.
It’s not an outcome that’s frequently discussed, either.
“It’s one of these things that a lot of people don’t really talk about. In Silicon Valley, we always talk about IPOs,” said Naveen Rao, VP of AI at Databricks and two-time founder, onstage at TechCrunch Disrupt 2024 on Thursday.
That silence can make the arduous process even more challenging for founders. “I’m so glad that this is being talked about as a topic on a panel, as a real path and a real outcome for founders, rather than the hallowed, inside secrets of investment bankers who strike a deal,” said Kamakshi Sivaramakrishnan, head of data clean rooms at Snowflake and a two-time founder.
“Acquisitions statistically are more likely than IPOs — arguably more successful in many scenarios than IPOs — and certainly something that founders have to kind of mentally and physically prepare for. It’s an endurance journey,” she said.
Rao and Sivaramakrishnan each built and sold two companies: Rao sold Nervana to Intel for $408 million in 2016 and MosaicML to Databricks for $1.3 billion in 2023. Sivaramakrishnan sold Drawbridge to LinkedIn for around $300 million in 2019 and Samooha to Snowflake for $183 million.
Both founders said they didn’t start their companies with the intention of selling them, but when the right deal with the right company came along, it made sense.
“I personally believe that you should build a company and try to make that into a real entity,” Rao said. “If something comes along the way, great. If you try to set yourself up to sell the company, it’ll always be bent that way, like you’re always for sale. And I think the outcome will never be as good.”
“You hear all these stories about ‘good companies are bought, not sold’ and ‘you should just keep going and have infinite perseverance,’” Dharmesh Thakker, general partner at Battery Ventures, told the audience.
“The reality is, most investors have a few hits that make 100x and they pay the fund. The rest of it, whether you make a 1x or a 0.5x or a 2x, it kind of doesn’t really matter. What we try to do is say, ‘Okay, if things aren’t going to be a 50 or 100x, let’s find them a good home early in the cycle,” he added. “It’s much easier to sell a company when you raise $10 million or $20 million and can still make a win-win situation for the founders and investors and get it done. It’s difficult when you have to raise hundreds of millions and then find out that things aren’t working.”
To determine when it’s time to soldier on and when it’s time to sell, Thakker analyzes the company using a three-point framework.
First, he analyses the product: Is it something customers love and are using? If a company is struggling to gain traction in the market, it might warrant a pivot, or it might be worth cashing out.
Second, he looks at the company’s sales and sales cycle. If the product isn’t moving or if it’s challenging for the sales team to complete deals, that might be a red flag.
Third, Thakker takes a look at the balance sheet. If money and runway is running short, that’s a pretty obvious signal that it might be time to look for a suitor.
“I’ve been fortunate to be an investor in MongoDB and Cloudera, Databricks, Confluent, Gong many others, where every time we had an acquisition offer, we looked at the framework and said, Are these three things true?” If the answer was yes, the Battery team encouraged the startup to remain independent.
On occasion, the founders needed a moment to “refresh” and “revitalize,” he added. “In almost all cases, the eventual outcome was a lot better than selling the company.”
But that’s not always the case. If two of the three items in Thakker’s framework aren’t positive, it’s worth reconsidering. Maybe customers bought the product but aren’t using it. Or maybe it’s a good fit but it’s not selling well. In both cases, the company can keep trying, but it’ll burn a lot of cash in the process. “In those cases, you should be much more open-minded, and the sooner you do it, the better off you are,” Thakker said.
When the time comes to sell, Thakker encourages founders to negotiate a deal that’s equitable not just for founders and investors, but their employees as well. “Let’s do right by employees,” he said. “Often, a big component of the acquisition is a retention package for all the employees. And inevitably, if you do that right, many of those employees come back, start a company, and you fund them the second and the third time. And the second and the third time, there are much better outcomes.”