Startups: Don’t Wait to Build Exit Relationships

Giff Constablestartups

Paul Graham’s latest essay warns of losing time and focus to “corporate development” staffers out there sniffing for companies to buy.

I agree with him on the corp dev side. But I wouldn’t want people to think that you should ignore potential buyers until “you want to sell your company right now.” It’s a question of whom you talk to.

Let’s put aside the rare scenario where you have an absolute smash hit on your hands and the only question is whether someone puts enough money down on the table for you to stop and pay attention. More startups will be in the middle – not doing too badly but not setting the world on fire either.

When you finally realize that, either due to changing market conditions or your own cash forecast, you might be better off selling, you do not want to wait until the last minute. Fire sales are bad.

Like most things in business, if you want something to move fast, it helps to have done some prep work ahead of time.

In this case, it is often about relationships.

If you are lucky enough to have an investor who is well connected to senior people at your likely buyers, that can sometimes be enough to get things going, and IMO those quiet conversations are how a lot of acquihires happen. And yes, Y Combinator companies might commonly have this asset.

If not, you need to build these relationships yourself. The potential buyers for your company are often those who are natural partners or competitors. Focus on the companies where you have a natural business development opportunity, whether for distribution or some other reason. Strike up those conversations early, even if you take your time on pulling the trigger.

In full disclosure, I tend to be skeptical on the impact of bizdev deals for most startups, but I *do* think that it is worth building strategic relationships early if for no other reason than to generate more awareness and interest in your company from folks who might want to buy you.

After all, the real thing that sets valuation is supply and demand, not corporate finance metrics. You will need to create a competitive process.

In the end, I’m not disagreeing with PG’s advice to be cautious of corp dev, but I do think you want to talk to the strategic (or product or operations) parts of your potential buyers early. And sometimes their bizdev people and their corp dev people will be the same, so don’t be dogmatic about it.

If you are interested in reading more about startup M&A, I’d recommend two posts:
– Justin Kan, the founder’s guide to selling your startup
– my post: selling your company – some core questions and answers