Part of the mythology of Silicon Valley is the dedicated founder who drives the company to a blockbuster IPO. In reality, startups are 16 times more likely to be acquired.
It is also not an outcome that is often discussed.
“It’s one of those things that a lot of people don’t really talk about. In Silicon Valley we always talk about IPOs,” said Naveen Rao, VP AI at Databricks and two-time founder, on the stage of TechCrunch disrupts 2024 on Thursday.
That silence can make the arduous process even more challenging for founders. “I’m so happy that this is being talked about on a panel as a topic, as a real path and a real outcome for the founders, rather than the sacred secrets of investment bankers making a deal,” said Kamakshi Sivaramakrishnan. head of data cleanrooms Snowflake and a two-time founder.
“Acquisitions are statistically more likely than IPOs – arguably more successful in many scenarios than IPOs – and certainly something founders should prepare for mentally and physically. It is an endurance journey,” she said.
Rao and Sivaramakrishnan each built and sold two companies: Rao Nervana sold to Intel for $408 million in 2016 and MosaicML to Databricks for $1.3 billion in 2023. Sivaramakrishnan sold Drawbridge to LinkedIn for approximately $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, but when the right deal came together with the right company, it made sense.
“I personally believe that you should build a business and try to make it a real entity,” Rao said. “If something happens, fine. If you try to sell the company, it will always go that way, as if you were always for sale. And I think the result will never be as good.”
“You hear all these stories about ‘good companies are bought, not sold’ and ‘you just have to keep going and have endless perseverance’,” Dharmesh Thakker, general partner at Battery companiestold the audience.
“The reality is that most investors have a few hits that return 100x and they pay the fund. The rest, whether you make a 1x, a 0.5x or a 2x, it doesn’t really matter. What we’re trying to do is say, ‘OK, if it’s not going to be 50 or 100x, let’s find a good home for them early in the cycle,’” he added. “It’s much easier to sell a company if you raise $10 or $20 million and still be able to create a win-win situation for the founders and investors and get it done. It is difficult when you have to raise hundreds of millions and then discover that it doesn’t work at all.”
To determine when it’s time to move on and when it’s time to sell, Thakker analyzes the company using a three-point framework.
First, he analyzes the product: is it something customers love and use? If a company is struggling to gain traction in the market, it may warrant a turnaround, or it may be worth making money.
Second, he looks at the company’s sales and sales cycle. If the product isn’t moving or it’s challenging for the sales team to close deals, that could be a red flag.
Third, Thakker looks at the balance sheet. When money and runway are tight, that’s a pretty clear signal that it might be time to start looking for a suitor.
“I’ve been fortunate to be an investor in MongoDB and 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 true?” If the answer was yes, the Battery team encouraged the startup to remain independent.
Every now and then, the founders needed a moment to “refresh” and “revitalize,” he added. “In almost all cases, the final outcome was a lot better than the sale of the company.”
But that is not always the case. If two of the three items in Thakker’s framework are not positive, it is worth reconsidering. Maybe customers bought the product but aren’t using it. Or maybe it’s a good fit, but it doesn’t sell well. In either case, the company can keep trying, but it will burn a lot of money in the process. “In those cases you have to be much more open-minded, and the sooner you do it, the better off you are,” Thakker said.
When it comes time to sell, Thakker encourages founders to negotiate a deal that is fair not only to the founders and investors, but also to their employees. “Let’s do what’s right for the workers,” he said. “Often a major part of the takeover is a retention package for all employees. And if you do that right, inevitably many of those employees come back, start a business and you fund them for the second and third time. And the second and third time there are much better results.”