When it comes to making a successful exit, timing is everything. Misjudge the market and all your hard work could end in a flop.
So how can founders best prepare for a sale, SPAC or IPO — and what comes after?
We asked all this and more to our panel of experts during our latest Sifted Talks, including: Rosh Wijayarathna, head of corporate finance at Silicon Valley Bank; Giles Palmer, chief growth officer at software provider Cision and former CEO of consumer intelligence company Brandwatch, which was acquired by Cision in February; Annalise Dragic, principal at Sapphire Ventures; and Felix Leuschner, former founders and CEO of car subscription startup Drover, which was acquired by car retailer Cazoo in 2020.
1. When and how you exit is personal — but prepare for opinions
How do you know when to exit? According to our panel, chatter from interested parties is a good sign.
Startups nearing this point will begin to get approached for a merger by interested parties, and often also feel the pressure from VCs and investors to grow equity value via an exit, says Palmer.
While investors starting to make noise is an indicator, Leuschner says the rest is personal. He recommends starting by asking yourself what you and your business can gain from an exit strategy.
“It really boils down to two questions. What are the potential upsides as a standalone company? And as a combined business? How do the two compare? And what does the downside look like? What are the risks involved, of continuing on your own journey? What are the risks of the combined journey? It’s a deeply personal situation.” — Leuschner, Drover
2. SPACs can be a great middle ground, but they aren’t without risk
Besides for the traditional sale or IPO, there’s another option: a Special Purpose Acquisition Company, or SPAC, which is a shell company that's purpose is to raise capital in an IPO to merge with an existing privately-owned company. The private company then becomes publicly traded as a result — sort of like a very expensive blind date.
Wijayarathna says SPACs fall somewhere in between the extremes of an IPO, which is riskier but allows founders to retain control, and M&A, which is less risky but founders often lose control altogether.
SPACs give you a middle ground where you can get a decent valuation and retain control. They’re the investment craze du jour so SPACs are everywhere, but Wijayarathna says this, combined with few companies for them to acquire, means greater risk.
How (and how not) to run a startup.
“There is a genuine place for SPACs in exit strategy. But with such a high supply of SPACs and so few companies for them to acquire, you’re going to get some creative structures and probably inflated valuations. There are going to be some great success stories and some not great success stories. It comes back to the vision of the business — does this SPAC help [you] achieve what you want to achieve?” — Wijayarathna, Silicon Valley Bank
3. Leverage your VC network
If you’re thinking of exiting, you’ve probably already got VC backing. This support can play to your advantage when you’re gearing up to exit, which can be a long and arduous process.
This is why it’s really important to get VCs on board from the start who share your vision, says Dragic. VCs can help build corporate development teams and introduce founders to the right people.
“One of the big areas where VCs can be helpful is recruiting independent board members and getting your board to the ‘public ready’ standard. As an investor, [we] can help with introductions to corporate development teams, or other teams which are relevant to potential strategic acquirers.” — Dragic, Sapphire Ventures
4. Speak to people who have done it
As with any big decision, it’s often important to get an outside perspective. But with so much money involved in the exit stage — for VCs, founders and potential M&A partners — it can be tough to find someone without skin in the game to turn to for advice.
Wijayarathna recommends reaching out to independent parties who don't stand to gain or lose from your decisions, especially those who have already gone through the exit process.
“When it comes to M&A and IPOs, there's a lot of money to be made for a number of different people. So speaking to somebody independent of that can be hugely advantageous and a bit diverse to some of the voices you're hearing already.” — Wijayarathna, Silicon Valley Bank
5. Post-exit, team integration is crucial
So you’ve completed an exit — now what? A lot will change, from new board members to public scrutiny and possible team mergers.
Founders should prepare to be unprepared, says Palmer and Leuschner, and that exits can be particularly tough on staff. The most important thing for founders is to understand the new identity and scale of the company, and keep regular and constant communication with their employees as soon as they legally can.
“20% of your staff won't want the change, they won't even know it. The staff turnover will go up by 10 to 20% that year, inevitably, no matter what you do, because the change is so uncomfortable for some people. It's insanely disruptive for almost everybody. But you can't predict or manage everything — you can just do your best.” — Palmer, Brandwatch
6. It’s going to get emotional
Going through the exit process — from finding a partner, to adapting to a new company setup, to potentially stepping back from your creation — is exhausting.
It’s also incredibly emotional, especially with a sale. Accepting that, and leaning on others, like VCs and advisors, can help a great deal.
“Realise that it's going to get emotional. Accept that, but also do not be afraid to lean around those you know, around your board or advisors to the business. That's what we're here for.” — Dragic, Sapphire Ventures
You can also watch our full Sifted Talk on building a trustworthy brand here: