
Is acquisition a valid exit strategy? - nkohari
I'm working on a business plan for an internet startup, and I'm not exactly certain of my exit strategy. I figure if I do the old...<p>1. Make website
2. Get lots of users
3. ???
4. Profit!<p>...investors might not appreciate it.<p>Is targeting acquisition looked down upon, or is it considered a valid exit strategy? Honestly, I'm at a loss how else would you exit the business other than selling it once it's profitable.
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pg
Trick question. It is a valid exit strategy. But it's not a good plan to make
your corporate strategy = an exit strategy. You should never be in a position
where you _depend_ on getting bought.

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mojuba
_You should never be in a position where you depend on getting bought._

Why not?

Not that I disagree, but just for the sake of discussion. You may sell things,
services or ideas, as well as you may sell entire companies. Is there a
fundamental difference?

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Kaizyn
Consider relative bargaining power when you enter into acquisition
negotiations. If you NEED to sell, then you will most likely accept any offer,
no matter how bad, from the buyer. When you can take or leave any offer put on
the table, you're in a much better position to bargain from.

~~~
mojuba
Valid point, although same applies to any type of bargain, be it selling a
mass product or closing a one-off deal. Any business depends on a need to
sell, and there's nothing wrong about it, except you may want to pretend you
are doing Ok. Acquisition is generally the same game, except it's meta-
business.

After all, doesn't everybody know YC depends on a need to sell?

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webwright
As opposed to what... IPO?

M&A is about the only likely exit strategy. Hopefully you look good on that
front-- if you don't have a liquidation event (selling, IPO, etc) and hum
along with a healthy 10% growth rate and 10% profit margin, you are a total
failure as fair as an investment goes. It's good to think about who could
theoretically want you and what asset you are creating that they'd want. Give
some thought to WHAT the big 3 buy when they buy a company:

1) A profit center... Profitable businesses are easy to sell. 2) A team of
innovators. Hiring is expensive. 3) A feature-set they don't offer and
couldn't develop as quickly. 4) A user-base that they can integrate with their
own, making their collection of services more "sticky" (Yahoo does this a
lot-- they want the @yahoo login to be hard to give up). 5) A targeted user-
base that advertisers love... Having a service that caters to 10,000 male CEOs
is better than having a service that caters to 50,000 people you know nothing
about. 6) An appearing of "coolness". Corp dev guys LIKE BUYING STUFF. It's
their job, it gets the company PR, etc. If you are a service that is loved by
a particular audience, you might get bought to acquire that goodwill. While
it's not the only reason, I think this is part of the MS Facebook
investment... To appear slightly less lame on the web front.

As PG says, it's a fairly bad business strategy to focus too much on. Set out
to build a business that CAN be profitable. You don't want to be looking at a
dwindling bank account praying that someone swoops in to acquire you.

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jgrahamc
Don't 'target acquisition' what you should be targeting is making a profitable
product. Make your customers happy, make money, then figure out the 'exit
strategy'. When I worked for Accel I would have been very uncomfortable with
an entrepreneur that presented an exit strategy. Yes, acquisition may be the
end result, but don't make it your end goal.

~~~
nkohari
That's interesting. I've always been uncomfortable even describing my exit
strategy, because it seems to be like presenting one means my idea is just the
means to an end. Not only is that not really how I feel, but it's sort of at
odds with an entrepreneur being prepared to sweat blood into a project to make
it succeed at all costs.

It also seems like saying "acquisition is my exit strategy" is the equivalent
of saying "I'm not sure this is a sustainable business model". Honestly, if
the business is profitable enough to attract enough attention that it might be
acquired, I'm not sure I'd be interested in selling anyway. :)

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Kaizyn
If you are concerned about your 'exit strategy' from the business you're
planning to start, maybe you shouldn't even bother. Seriously, if you're not
interested in building something to last, you might as well go into another
fields such as financial derivatives or hedge fund trading. As a consumer, I
would be less inclined to do business with a company run by folks whose goal
was to 'exiting' as quickly as possible.

~~~
nkohari
I agree entirely, but you have to look at it from the perspective of the
investor. The only way they actually get paid is if the company has a
liquidation event. That's (at least in my understanding) why all VCs want to
know your exit strategy.

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nickb
If you can get past step 2, you can almost always find a way to monetize your
business. Now, is that going to be enough for an investor to invest? No.
You'll have to show that you will be able to grow and create something that
someone will be willing to pay a large amount of money to own. Many companies
end up being lifestyle companies and don't have a lot of upside for serious
investors to really consider investing. M&A is definitely a valid exit
strategy and make sure you have a list of possible exit targets but don't make
'chasing suitors' your business strategy! IPO market has been anemic lately so
M&A is definitely the way to present your case to investors.

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vorace
I'm working on a similar business plan right now, and am having the same
difficulty. Our software solves a problem and I believe we can get a lot of
users, but despite adding in ad revenue and a vague "enterprise edition," the
numbers just don't add up into something attractive.

Is it best to be honest about this, or beef up the numbers?

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jgrahamc
Start with the assumption that you can get lots of users. If you can then
listen to those customers very, very carefully. You will discover some
additional value that you can bring by adding specific features; charge extra
for those features. It's OK to have lots of free users, it's also OK to say
that you are not sure about the revenue, but I'd be on the lookout for an
opportunity to charge a customer to extra value that your product is bringing.

~~~
nkohari
Is it really okay to say you're not sure about revenue? I keep reading that
that's one thing you really need to nail down. (Then again, I see these
companies like Twitter with no realistic business model get funding...)

~~~
jgrahamc
I used to sit through presentation after presentation every day and they all
had revenue estimates.

No one in the room believed those estimates, not the entrepreneur and
certainly not the VC. It's important to have them because they indicate that
you've tried to think about how you are going to make money. Also, no one
manages to actually make those estimates either because there's always
something that goes wrong, or better, or sideways.

So, think about how you are going to make money, make a revenue plan (and an
expense plan). Present the plan you have, but don't be ashamed if you don't
make it.

It's worth asking yourself about Twitter. Why would you fund Twitter? Well,
you might look at the enormous traction they have, and if you think the team
is smart then you'd say to yourself "Here's a team with lots of 'customers'
and the smarts to figure out how to monetize them".

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henning
JGC, personally I'd love it if you blogged/wrote somewhere about
being/becoming an independent consultant, especially in a righteous/sexy
domain like anti-spam/text learning. :)

~~~
jgrahamc
I can summarize it like this:

1\. I had no other choice. After years of working for people I just needed a
break.

2\. It's harder than it looks... my income is totally variable.

3\. It's the best thing I ever did. I get to choose what I work on (to a
certain extent).

I'm actually thinking of going back full time, but that's only because a start
up is enticing me with an interesting combination of good team, interesting
problem, and stock.

We'll see.

