- Today we're gonna talk about exit strategy.
(slow beats)
We're gonna talk about how to build
a startup for an exit, have an exit strategy
where you build a company
to sell it really quickly.
This is usually not how I build companies.
But it is a strategy that some people used
very, very successfully.
- Have been fortunate enough to exit
five of those eight,
your interests are not aligned with the traditional VCs.
- The VCs are really only expecting
to make their money back on one out of 10.
- I cannot tell you how many startups
I have looked at that has a solution
in search of a real problem.
- When I talk to somebody who's done it not once
not twice, but five times
we're gonna look at everything that he learned
throughout the years
we gonna look at eight lessons to build a company
fast for million dollar exit.
(upbeat music)
- [Man's voice] This is Raw startup.
- We're gonna look at eight lessons
to a fast million dollar exit.
And who was I gonna call
obviously, someone with tried it before Hendrick?
Who are you and what have you done?
- I've been involved in eight startups
and have been fortunate enough to exit five of those eight.
With a collective value of north of
150 million dollars.
- Let's go through the best ones.
(forwarding)
- And sell that to
a company in Chicago, called SPSS,
which is now owned by IBM.
(forwarded)
Prima-tech was later on sold
to a desktop Configuration Manager
in in Scandinavia, called CapaSystems,
(forwarded)
was involved in a company called install
that only after about 18 months, we were fortunate
to sell that to VMware.
(forwarded)
I was involved in another company
called Kenta, Terra
that we sold to Quantum
and also involved in a company called Cloud volumes
that we also sold to VMware.
So that's the so that's the track record so far.
- [Man's Voice] Number one, begin with the end.
- Who has that potential buyer or aquire
could could really benefit from this.
And so, you know, a classic sort of startup team
will head down the path of solving
something that they find important
but but not really sort of from the outset, think about
who could be a potential acquirer for this.
And in my advice, to to technical team
to set, put your idea, put your early product
in front of the customers,
ask them how your product fits in
to their larger infrastructure, and they will tell you
know, how you fit it, who you should integrate to
then integrate like mad into those platforms.
And don't be shy to call these vendors up, you know,
if it's VMware or it could be Microsoft,
or it could be Google, call them up, have a dialogue
early on, doesn't matter.
You're not sort of like putting a for sale, sign up
in the window, but you're starting
to develop a relationship.
And that's really important.
- You saying that even from day one
you're looking at,
you're not talking about selling the company
at this point, but you're thinking
Well, this could fit well into this company.
Number two, solve a real problem.
- I cannot tell you how many startups I have looked at
that has a solution in search of a real problem.
(laughter)
- And so, engineers are good at that.
Right?
- And they're great at that.
And so, so it's curious sort of proof point
number one, right?
If you can put your product
in front of a customer, and they tell you that
it solves a problem and they're willing to pay
real money for it.
Guess what, you probably got some, some something.
- It's really all right.
- You know, you've got to validate your idea early
for the love of God, bring that idea to market as an MVP.
Don't just stay at home and sort of
keep coding in search for the perfect solution
that will never happen.
So get out there.
Get in front of customers, have them installed
and have him buy it and then expand.
I usually tell people, you know, hire a hacker
and hire a hustler, right?
Because, you know, typically, developers
are not super extrovert.
They're shy.
They're afraid of rejection.
All sorts of okay personality traits,
but you've got to have somebody on your team
who can pick up the phone
and call and say, Hey, what do you think?
- So what are you?
- I'm a hustler.
(laughter)
I stopped coding many years ago.
- Number three buyers are looking for
technology, talent and proof, not revenue.
- So a lot of buyers are sort of
in this innovators dilemma, right?
Do they they have a hard time innovating inside
the organization because
typically, sort of a large organization
will sort of continually improve on what's there
as opposed to develop all new, right?
so, so larger companies are
deliberately looking for
new technology, but this technology
is worth nothing to them unless there is
a pool of people that is there that comes
with the technology, they are not interested
in your revenue, you need to have
you know, 510 customers that are all paying real money
are happy with your product, that potential acquirer
can can call in Say What do you think?
- Number Four have a real business model from day one.
- A bunch of guys are developing something
and they're like, Oh, yeah, build it,
and they will come, you know,
we just need downloads, we need clicks,
we need pull from GitHub, you know, whatever.
And then once we have a million
of those, we'll start charging something for somebody.
And, you know, it's, it's, it's just too late,
you know, if you don't think about
how you gonna make money, what is the value
you're bringing to the customer?
What will the customer pay for it?
I mean, in so many cases, you could ask them,
you know, if you're using my tool, or
you're gonna save money, or you're gonna make money
or gonna lower the risk, right?
It's usually a combination of those three.
And what is it worth?
Don't be shy, go out there, start charging
for your product, right?
And if a customer pays real money,
you've got you've got something real here
solving the same problem for multiple customers
and having multiple customers buying more product
along the way are two really important checkpoints.
First, go in there, get on the radar
saw the problem, get your fans in that organization
that for a large organization is typically
like $10,000 a year, they can do that, sign off on that
and then fix that one problem.
And then then then from there.
- It's like a beach check, like find a corner,
and then go from there right?
- Yeah.
Absolutely.
- Number five.
B2B is a lot easier than B2C,
a lot of consumer products
they will need, they will need to be free to begin with.
And then you build a business model
on top of that, a Vivino is a good example of that.
And we started in 2010.
And it took us a long time before we actually really built
a business model we tested early on,
but it wasn't until six, seven years in
that we really started pushing
the business model, and hey,
somebody needs to fund you up to that date.
And at that point, you can't do a small sale.
You have to you have to raise a lot of money
to be running for five, six years at this scale.
- There's so much timing and so much luck involved that.
Even if you have something that is really solid,
it doesn't mean that you can actually get
your message through to your like, you know,
customer base.
So.
- I just want to second that for someone who's done well
in business to consumer.
Is that my first choice
if I want to be if I want to build for an exit, no way
it is like Henrik said, It is super difficult.
And I know so many people that have done incredibly well
and still not have the success.
In fact, there is B2B is easier to get started with.
Number six VCs are not your friends,
VCs, as in venture capitalists.
- The point I'm trying to make here is that your interest
as a founder, building a company for an exit,
your interests are not aligned
with the traditional VCs, right?
What what most founders fail to understand is
that the majority of companies are acquired
in a range of 25 to 100 million dollars
in typically two to three years
after after they got funded.
And that is not interesting for the VCs.
If you look at this chart here, you can tell
that from a portfolio of 10 companies, the VCs
are really only expecting
to make their money back on one out of 10.
Maybe they will have two or three smaller ones
where they, at the very least get their money back
maybe with with some upside.
But in order to return the fund
with an appropriate amount
of interest, they have to go for a billion dollar exit.
And that, of course, drives their playbook
in their behavior, right?
They would rather have you fail,
trying to reach a billion dollar exit,
then then letting you out early.
And that is really important, right?
Because if this is your first startup,
and and the company's asking you
if you want to be acquired
for you know, name a number
$50 million, and you own 20 to 25% of that,
you know, you're going from probably having student debt
to putting $10 million in the bank right?
- Yeah.
- And and that is life changing for you
as an individual
you just went from average Joe
nine to five job to being financially in control
of your of your life from that point on
if you if you played smart, right?
But that is not what the VC is interested in.
They if they can see the potential
$4 billion exit, they are of course gonna encourage you
to to pursue that, and they're gonna add more money
and with more money, you're at time
and with more time you add more risk.
- The point is, if you're building for an exit
quickly, it should probably not be the VC route to go down.
What kind of funding would these companies typically get?
So we're talking now exits
between 25 million to 100 million,
what kind of what kind of funding could they carry?
- So look at the other chart that I that I found.
So typically, you can see that
the the exit valuation is somewhere between 25
And 100 million.
And you know that the sort of the crosshair
or the sweet spot is somewhere
in the, you know, five to 20 X
the raised amount of capital,
you could easily envision
a, you know, 30 to $60 million exit, right?
And on $3 million sets.
Amazing, right?
And so say $60 million, three years
in the making, you're still a founder, you own 20%.
You just bang to the 12 12 million before tax.
- Yeah.
And and taking that back again, it's
the core here is that
if you're building for an exit, you cannot raise
a $10 million a round or even raise 1020 $30 million.
It just doesn't work like that.
Then you have to aim bigger.
Number seven, go for the tuck in acquisition.
So anyway, let's talk about what type
of acquisitions do we have?
- So traditionally, the sort of
the big strategic acquisitions
are the ones that you hear about in the in the media, right?
Those are the $1 billion Plus, those are like big bets
from big companies.
Those are the ones that you sort of like, aspire
to to be become, right?
- And examples of that would be Microplane, LinkedIn
or Microsoft buying GitHub.
- However, the majority of of acquisitions
are so called tuck in acquisitions, and tuck in,
it sounds cute, but
but really what the customer is or
what the what the buyer is going for
is, you know, an additional feature
and additional function,
something that will make them better faster, right,
but they already have, you know,
the platform or the solution.
These are sort of like additional feature sets
that they are looking for.
And rather than building it themselves,
they are um, they're going for a an acquisition.
- But then Vaughn is it's sort of
it's known as an Acquihire right?
- And traditionally, that means that an acquiring company
is interested in the team
and the expertise that team has right?
In many cases you will see Acquihire is
where some founding team has been trying
to build a product, they have perhaps
not been super successful in getting this product to market.
But But there is a real product
there is a real team, there is some coherency
there's a lot of knowledge
that has been acquired along the way.
And that has, of course value.
So those Aqua hires are, um,
you know, typically, you know,if the investors
are lucky they get their money back.
- Number eight be an easy target, not a complicated target.
- Of course, you need to hire a top notch law firm
to get you Incorporated.
Get all the legal agreements in place from day one.
I mean, that's a no brainer, right?
You also need to have a really strong
either a CPA, which is a public accountant in the US
or somebody who's really savvy
because guess what, if you get approached
by a potential acquirer, they wanna see projections
of five years of expenses
and and, and the revenue
and maybe only nine months in.
And so somebody has to come up with that plan
and, and it's typically not the the founding technical team,
right?
Um, and then finally,
you know, make sure that you have
a really solid, you know, HR strategy
to so you can retain people
that's really important for acquires
that once they acquire you they typically have
sort of a key key person or key personnel clause
that at the very least this court, you know,
group of people are, are staying for a certain number
of years, but, but it makes sure
that everybody is incentivized to stick around.
The what not to do.
- That's more fun.
- Right?
It's kind of more fun.
And so I'm here at here's one that is fairly controversial.
Um, do not incorporate your company overseas.
And by overseas, I mean anywhere else than Delaware, right?
If you know most acquiring companies are
still in the United States
and they would like to see you be incorporated
in Delaware, because that is the standard.
Those are the most friendly terms.
They know how it works, they know their risks
and their liabilities and so on and so forth.
The other what not to do
is, you know, you are a scrappy little startup,
you're raised a couple of million dollars,
and you have people that are working
as independent contractors all over the world.
Really bad idea
companies that are acquiring, they
actually want a small team preferably here in Silicon Valley
that they can just sort of move over to their offices
and be done with it.
- Gets complicated, real quickly.
- Complicated, and they don't really know these people
and you know, how solid are they,
they're gonna stick around
for a couple of years, you know, so even though
it's super hard as a small company,
try and get a band of of people together
in a physical location, even even though
it's really really hard.
Another don't do this is,
you know, you're bored and you're at your current job
and you want to pursue your startup
and you do that while you're in the Office
of your former employer or soon to be former employer,
using their equipment, their networks, their offices, right?
Don't do it, have a really clean delineation
about who you work for and where you work.
The last one I want to leave everybody with is
please don't solve a big problem in a small market
with even fewer buyers
be really honest to yourself about it.
I mean, I, my first my first startup
we sold to SPSS was was exactly that
this little company probably
had maybe 100 potential customers in the world.
Right?
And so it was and we solved a huge problem for them.
But the but the sort of addressable market
was was really small.
And and we only had sort of probably
a handful is that of potential acquirers.
And we were lucky to get acquired by SPSS.
- So your concern here is that you invest
a hell of a lot of money into a big problem
that's complicated to solve, you actually solve it,
and it's a fantastic problem.
Problem that's now solved.
But the problem is that
there are very few buyers and for the Cisco's
and VMware as well, it just isn't interesting.
- It's not interesting at all right?
Um, and so this goes back to the very first point
we made in this in this session was,
you know, begin with yet, you know, if you can only think
of one potential buyer, maybe you're solving a real problem.
- Okay, here we have the list.
This is a very unique list.
And not very many people talk about this particular strategy
to build a startup and we've just learned
from the best
if there's something you disagree with, hey,
put it in the comments.
Tell me what you think.
Make sure you like and subscribe
so you know exactly when the next video lands.
Thank you very much for watching.
(soft beats)