Startup Therapy Podcast

Episode #24

Ryan Rutan: Yeah, as founders, we're all familiar with the concept of an exit plan. Questions about it are a common refrain from investors, employees advisors or anyone else with a piece of the cap table that's hoping for a payout. But how much is planning part of the actual

Wil Schroter: outcome

Ryan Rutan: on today's startup therapy podcast? We'll discuss what you can actually plan for what happens if you don't plan at all or if you don't actually want to sell. This is Ryan Rutan from startups dot com back for another episode of startup therapy podcast, joined as usual by my partner and the ceo of startup dot com Wil Schroder, we have no shortage of evidence around exit plans because we often end up being the exit plan for companies having, you know, acquired what like six or seven dozen at this point,

Wil Schroter: it's been a lot and

Ryan Rutan: feels like it.

Wil Schroter: Yeah, it's, it's interesting for us because we're in the business of helping people create startups, but you know, just lo and behold with the amount of time that we've spent building this company. We've also been the discussion with a lot of these startups, Hey, you know, you've built a great startup. I think we'd like to buy it. You know, we're, we've been on both sides of the, of the equation, which is kind of unusual, right? Most startups only see one thing, which is, I'm building this one startup one day. I'm hoping to sell? We've been on very much both sides that discussion. So I think we have a lot to talk about today.

Ryan Rutan: Oh, believe me, this is gonna be a long one, settle in, folks, get your beverages ready, let's do this. So as we talk about, you know the exit plan, right? And, and I think that this is something that gets kicked around a lot. Uh you know, do I need to plan to sell? You know, what's my, what's my long term plan? It's always funny to me because sometimes I'm hearing this this question, should I plan to sell this and like have you even sold one of your products yet? They're already there anything that I like, you might want to think about selling something to a customer and then put a little more thought into selling. But it's still a valid question

Wil Schroter: right? Yeah. And I think, I think people are concerned that if I don't have this sense for when and how I'm going to sell, if I don't have my exit strategy plan that I'm, you know less of a founder, less of an entrepreneur and I think Ryan, if we're going to have this discussion around planning to sell your business, I think we should start not with how do I talk to people about buying my business etcetera, but more about our business is bought or sold.

Ryan Rutan: And I think that's a great point.

Wil Schroter: Yeah, I think that distinction is so powerful because most people listening to this podcast would have had no reason to ever have sold a business before, they haven't been through the process and why would you write, it's a one time event, right? I think we should start with talking about the fact that businesses are bought, not sold right. In other words, the motivation to form an exit is typically coming from who's interested in buying you, not just because you feel like selling. I don't think people understand how the cell process works and you know, we'll unpack a little bit of that today.

Ryan Rutan: Yeah, it's just a handful of ready buyers at any given time. It's like, all I had to do was go to Home Depot by the orange and black sign, stick it on my business and lo and behold it sold.

Wil Schroter: Yeah, just to be fair again, there's no reason you would know this in most cases and nobody else knows that every founder is figuring it out for the first time, but just a little bit of inside baseball, the way most acquisitions happen is that a buyer expresses some level of interest in your business and things escalate, right? There's a bit of a sense that the exit starts the moment I say, I'm ready to sell my business, right? Just like you're ready to sell your house. You know, you go to your real estate broker and they put the sign up as you said, and people start sending offers and by the way, there are versions of that that do happen, right, that sometimes involves investment bankers, sometimes it involves business brokers, there's some of that, but I don't think that's what we're talking about right

Ryan Rutan: now, it's not the vast majority of the deals that we see for sure.

Wil Schroter: Yeah, man, if you get so big that an investment bank is brokering your deal, right. Whole other discussion. And if you're in the smaller side of things where you're trying to broker out your subway to sell to somebody different discussion, I don't think we're talking about either of those. I think we're talking about average startup that's building something in some cases, raising money and thinking, hey, I got to exit this thing someday to get liquid on it. But to be clear, what's going to happen in most cases is a buyer most likely a partner and we'll kind of get into this in a little bit. Most likely a partner or somebody that, you know, will say, I really like what you're doing. I'd like to have a more detailed in depth conversation, right. Which often is code for, I want to start looking at acquiring your business. How do we know this? Because we've done an awful lot of it. Right.

Ryan Rutan: Yes. So let's run down the list and we've done this. How many times now will six?

Wil Schroter: And those are just the ones that we finished? Yeah.

Ryan Rutan: Is that all? Yeah. And that's, that's, that's an important, that's that both those are important points. But I think that's a really important aspect of this, the ones we finished. right. So if memory serves and we're at, we've probably evaluated closely evaluated like where we were to the point of some fairly serious dating 40 40 plus.

Wil Schroter: Absolutely. And I mean think about that, think about the threshold even to get to that discussion at which point folks are sending you their financials and you're having discussions with investors. You know, by the time you make it into true diligence where there's real sensitive information transacting. That's much further than, hey, this might be an interesting partnership. So to your point Ryan, we've looked at 40 companies at true diligence process. We made offers on six and we bought six. So by the time we made offers, you know, things happen to go through. But man, we've been through the other side of this process an awful lot.

Ryan Rutan: Yeah, we have. And I think something important to a distinction here and you've, you've mentioned the word partners a couple of times in none of these cases did we come out of the blue and just surprised the hell out of somebody with an acquisition offer. Right. And, and I think that that's, that's something I think people think that like, well, I just need to, you know, I need to be growing, need to be doing this and doing that. And then then all of a sudden acquires will show up at some magic point. It's just not really the case right. These are gonna be people that, you know, that you have some relationship with and in this, in all, all of the cases that we talked about, the 40 that we evaluated the six that we bought. We had existing relationships with the founders.

Wil Schroter: So let's talk about it. Ryan. Well, first off, if you wouldn't mind, can you just rattle off the ones that we bought? So folks have some reference points.

Ryan Rutan: Are you saying you don't remember them?

Wil Schroter: No, I don't remember at all. I'm still shell shocked and PTSD after all the Dylan.

Ryan Rutan: Let's see if I can get them in the right order. Alright.

Wil Schroter: We've got,

Ryan Rutan: let's get in the right order. Alright, so we've got, we've got launch rock and then I believe it was clarity and then killer startups and then Zanna and then virtual and what am I missing

Wil Schroter: business plan. Yeah. So there we go. So across all of those, some interesting things and, and, and folks, if you're listening closely to this because either you're thinking about selling or you don't understand the sales process. I want to walk you through how a buyer and in this case us looks at the process and it's not totally dissimilar to how a larger buyer, potentially a buyer in your space will do it. The first thing that happens is the buyer is likely looking at their strategic plan in saying there's some aspect of what we're trying to do that we just can't do, right. I think people miss on this one because they're assuming, hey, we're doing something that's interesting to google ergo google is going to buy us. Not necessarily before they get to that thought process. They say we need this product or service in the market, can we do it ourselves? Because doing an acquisition is a huge pain in the ass, right? It requires so much bureaucracy. Let's forget the cost for a second. It requires so much time, so much bureaucracy, So many people to agree, not just on our side, but on their side as well. And even once we agree, it's got to go through legal and all these other hoops to actually get finalized. It could take 18 months to two years to ink a deal, yep, versus investing internally and just building it ourselves. Right.

Ryan Rutan: And that's always been the discussion, right? That at the, at the very highest level that is the two sides of the scale, right. Right. Which is going to be a bigger pain in the ass if we've decided that strategically, we need this and it has to exist within our business. Are we gonna build it? Are we going to buy it? Right. And, and it's not an easy distinction to come to,

Wil Schroter: well, let's walk through it. You know, I'll use an example of one of our own companies, a great company we bought called clarity dot FM. An amazing product that connects mentors and other founders, subject matter experts to founders and startups that need their help, There's over 20,000 mentors on the platform, you can get on the phone usually within a day or two, uh, sometimes same day with any of these experts or just ask them a question right online,

Ryan Rutan: same day call on saturday

Wil Schroter: all the time. Right? Yeah. It's, it's an awesome service. I can brag about it because it's not a humble brag because we didn't build it.

Ryan Rutan: I tell people that all the time, like it's my favorite and I can say that because it's not actually ours like

Wil Schroter: exactly right. In looking at that as a startup platform. We looked at our strategic roadmap and we said, do we need the ability to connect our audience to subject matter experts, mentors etcetera and, and Ryan, you remember this? It was like the top of our list right of things that we needed. And so the first thing we looked at like everyone else does and again, this is important. Can we build it ourselves? Right, clarity is not complicated, right? It's a database. You're right. And a million people have tried to replicate it. It's a database of experts and an ability to call and schedule, right? Not super complicated, but for whatever reason dan martell in all of his infinite genius. The founder of the company figured it out. He hit critical mass. He got enough buyers and sellers. He built the one platform that just works beautifully, right? So when we looked at the probability that we could replicate that while we're doing all the other ship that we're trying to do to build, our company were like not going to happen. Right? And I think if you were dan and you're looking at the other way dan martell from, from clarity and you were to say, hey, I want to sell clarity to somebody Number one, you wouldn't know what our motivations are, you wouldn't know what what's on our roadmap. Right? So the idea that I can just find a company to sell to, you'd have to know that that's even in their, in their crosshairs right, yep. And when people say things like I'm just gonna sell to google, I'm just gonna sell to facebook, I'm just going to sell to, you know, again, I'm just using tech companies and you can use your own version of of what's in your industry. I think about that. I'm like, do you have any idea what it takes to get on their radar on their roadmap and into the part of the discussion where they actually want to make an acquisition like

Ryan Rutan: yes, a billion users, how many billions of users do you have? Well we have, we have a decimal percentage of a billion, what does that count for? Not call us later.

Wil Schroter: So sticking with dana, sticking with clarity, we looked at clarity saying if we could do a deal with dan that would allow us to automatically have market presence And it would allow us to focus on other stuff, like basically take our resources and start working on the next thing that we needed to add to the platform without spending 3-5 years to maybe build clarity right to maybe have that service And again, right, How many people have tried to replicate that service?

Ryan Rutan: So interestingly enough, you know, we get a lot of interest around our products and white labeling stuff, but clarity is by far and away, the most active on that front. I'm not sure that week goes by that. I don't feel some sort of, hey, we'd love to white label clarity or hey, will you sell us that technology or hey, you know, when you hand over your code base, um, if we asked really nicely and yeah, it's a lot of people right, for a lot of different reasons.

Wil Schroter: So here's the point from our standpoint, so many stars had to align for us to even be interested in in dan's business right from dan's standpoint when he, when he made the decision that hey, I think it's, it's interesting to sell the business. He started to talk to different acquires. We were one of them, you know, we were in competition with other people when dan was looking at different acquires while some of them made a better strategic fit in some cases or they were bigger companies that could potentially offer him more money. This is the part people forget about it doesn't mean that any of those people, we're in a position internally to do that deal. That's right. You see big companies, small companies, etcetera. They're not just sitting around with bunches of cash that they don't know how to deploy unless you're apple, but you know, tons of cash that you don't know how to deploy right? Waiting for someone to call them up to sell them something right. Like these things take such a long time to develop and so many stars need to align for that ball to start rolling, which is why we're saying companies are bought not sold because the buyer in this case us has to have all of those things align in order for a bite to start, There is an assumption that when I'm ready to sell all of my potential candidates will all somehow miraculously have those stars aligned at the time that I'm willing to sell. Yeah, it doesn't work that way. That's

Ryan Rutan: often, that's one of the reasons why it takes so long, right? You may actually begin the conversation with your final acquirer and it may take two years before they're in the right position where it's like it makes total sense where they're clear on what they want, where they're clear on you being the right fit as a product or service and and being able to do the deal right. And even if you meet them day one, it may take years before those stars, as you put it align to the point where a deal can happen.

Wil Schroter: Absolutely. Think of how many things have to align internally, especially at a big enough company to buy you right? You have to have the executive buy in. So let's say at the very least you have to have the Ceo, you have, you have to have whatever the other executive team members, often the CFO, the CTO. Now let's say it was a tech product, right? Let's say it's a mobile app that you're trying to sell to a big company. The C. T. Is going to look at that. And if it's like most CTO is, what's he going to say? We could build that. Yeah, we

Ryan Rutan: could build this, we can do this ourselves.

Wil Schroter: Right. And so even though the biz dev guy was really excited to talk about your product and maybe do a deal because that's sort of his job right the moment it got wrapped up into internal politics, it got kicked off for 18 months, 18 months later, we'll talk about when the CTO never delivered as he often doesn't why we may be buying your product again, so many things have to happen. But the the net of this part of the discussion, let's say is that in order to take your product out there and and sell it, you have to be able to be aligned with a buyer at the right time and place, which is very rare when we did the clarity deal Dan worked with us. And it's worth noting Dan and I knew each other for 10 years, you know, prior to doing the clarity deal, we'll talk about relationships and stuff maybe later on. But this didn't come out of nowhere, Dan and I talked for years about doing some sort of partnership or some other sort of deal together. So this wasn't, it wasn't incidental dan didn't just decide to sell and I came out of nowhere. Right? These things take a very long time to materialize.

Ryan Rutan: Well let's drill down on that for just a second because I think this is really important, this piece around relationships and, and the things that we can actually plan for, Let's talk about how those things come about.

Wil Schroter: Okay, so you mean like our relationship with dan for example, Right, Okay, so again, I'm going to use The other side of the equation to prove the point. Ryan, where we were talking to 40 different companies as we were doing acquisitions. It's really important to note. We're talking to 40 different companies over a five-year period, right? It wasn't like, you know, all in a year and that most of those companies, a lot of those companies, if not most of them, we had relationships like we did with dan for years longer before we even started startups dot com.

Ryan Rutan: Sure. And let's talk about how some of those came about. So like we're talking about people that we had looked at doing, uh co marketing with, we had looked at people that we were, you know, talking about licensing pieces of technology or, or, or sharing marketing budgets on, on co built resources, lots of different things that lead to those relationships at the very early stages. Well before, right, it wasn't like, oh, G five minutes later, we were like, hey, you know, we should probably talk about acquiring these guys, right? There was a long process and that's with good reason, right? You're, you're not just, it's not just about your strategic need for what that company offers, it's about understanding the company more more intrinsically about having a true relationship with the founder, because that has so much to do with the success and the ability to even pull off the deal in the end, Right?

Wil Schroter: Yeah. And I think in every case either where we've sold something to somebody else, you know, doing one of our own exits or, or buying somebody else's company number one, it was always the relationship and I don't want to make this, this one an amorphous data point. Like you should have the relationship. Let's talk about what it actually means to form that relationship, right? Like if you want to grease the skids a little bit and get this going. Let's specifically talk about what that looks like, What that looks like is finding people that you could work with specifically folks that again, might be your exit partners in trying to build some sort of working relationship with them, not calling them and saying I want to sell to you doesn't make any sense. You call these companies and you say I want to work with you in some basic capacity. You start to use that as an in road to build a relationship with the key stakeholders there. Yeah. Who will change over time? You build a relationship with a person who's running biz DEv, they leave to go to some other company to do business and now you're still building a new relationship with whoever they left behind. It may take you four years to to wind up getting to an exit point and you might have gone through seven stakeholders through this one company. But the point is having a reason to do business together long before there's ever an acquisition because that's usually what it leads up to.

Ryan Rutan: Yeah, that's interesting that in my own case with the acquisition of my first company, it was a competitive relationship that led to it. So it wasn't, it wasn't something that we were cooperating on, we were actually competing and we managed to win out a couple of really, really big like national level clients and pissed them off just enough that they wanted. They wanted to buy that

Wil Schroter: works too.

Ryan Rutan: Yeah, it worked, It worked right. We had a core competency in html email at the time that they didn't have and we had the clients that, that they wanted. And so those two things led to. So instead of instead of fighting us any further, they said, hey, look, you guys are cute and you're, you're beating us out in these specific categories. But you know, we can do a lot more with his clients. So why don't you let us take you out of the equation eventually agreed.

Wil Schroter: Yeah. And look, when we call on companies down and again, we're still actively looking at companies, etcetera when we talk to companies. Now, the first thing we say is is there some way we can work together? Is there some way we can um, whether we're, we're working with each other's leads and, you know, business opportunities, some software that might work together, you know, any kind of working relationship that we can have because what I've found time and time again is that what makes the relationship go just that one step further is that we actually like each other, right? You know, we just kind of enjoy Yeah. You know, we just kind of enjoy working with each other and it would be fun to kind of explore something more interesting Now in some cases. Again, maybe that doesn't exist. Maybe the person on the other end of the email or the phone isn't that interesting. They're not that much fun. It's strictly business, Hey, that's fine. But my, but my point is the relationship is what gets us over that initial awkwardness of is this a bigger conversation than I think it is? And they say, hey, let's just explore it a little bit more, right?

Ryan Rutan: Yeah. I think it makes that part of it that much easier. Right? So that, and again, it's not coming out of left field. It's, it's not something that, you know, it's usually a huge surprise to these people. And again, because we have a relationship with them entering into that conversation can be done in a way. And I think you've done a really good job of this in particular happened in a way and at a time where they are most receptive to receiving that information.

Wil Schroter: Yeah. You know, it's, it's, it's interesting you should say that Ryan, because my approach is always the same. I say that given what we do at startups dot com, our mission is to help founders. So it would be awfully shitty of us if our mission was to help founders. But I'm equally going to try to screw you in my, in my acquisition of your company against what we

Ryan Rutan: just send them that the email that says we are going to buy you with just the Jif of all your base are belong to

Wil Schroter: us. And so, so what that conversation looks like is, and I say the same thing every time I said whether you sell to us or not, I mean it is what it is. You make the best decision you need to make, all I can do is arm you with how this process works, right? So I can explain to you how acquisitions work. I can explain to you how valuations work. I can explain to you where you stand in the recipient list of the proceeds because most founders don't know, right? They don't understand preferences and an investment. They don't understand a lot of things, right? And I will tell you straight up this could be a great deal for your company. That could be a great deal for us. But it's a shitty deal for you. Yeah. And I don't mind saying that right because at the end of the day, you know, life is long and I want to have good relationships with people. But what I do say is take the best deal regardless of whether it's ours, right? We'll present it to you will also tell you if our deal isn't your best deal. And we've done that on numerous occasions. In fact, now that I think about it with dan at clarity when we made our offer to him, he had another offer that was more money and dan would have gotten more money off the table. And I said dan as your friend, you should take that deal right now. It ended up having some caveats that would have locked him up for too long. And once that came to the surface, like, well dana at this point, I think, you know, the answer probably is because he wanted to go do other stuff. But I think the, the savvy way to, to walk people through the, the acquisition process is just to say, here are the terms, I'll coach you on, how to understand the terms and I'll trust you to make your best decision. And I think that

Ryan Rutan: it has and we've got the benefit of having six case studies that we can walk them through directly on. Here's exactly how this wind here is what we thought from our side here. We're sort of the decision matrix on the other side of the table. It's similar to yours and this way it's different in that way. And I think that helps to put people at ease as well because we can sort of demonstrate very clearly how this has worked for us in the past.

Wil Schroter: Right? And also I think what happens is when folks take that understanding and that learning and they go look at other deals and they start to understand what some of these terms look like, like a lock up or anything else like that. They was like, well damn, like will might not have been the best deal that was presented to me or startups wasn't the best deal that was presented to me. But at least I understand why now, right? Um, and I feel better about this decision.

Ryan Rutan: Yeah, I'd be willing to bet that we may not always be the best deal. Obviously we haven't, otherwise we'd have acquired 40 companies at this point. Now, some we said no to, but I think the other side of that is that we were always the most helpful partner in terms of moving them through the stages of selling a company. I doubt we're getting that same level of, of candid advice and perspective from everybody else they worked with.

Wil Schroter: But I think when folks were working through this process, uh, some things that were very consistent, that I would give folks advice for to say this is how you can kind of prepped for sale number one, I think people were very honest about what they were trying to achieve from the outset and what I mean by that is not going into the first meeting, say, hey google, I'm here to sell to you, right? Not that here's what I want to achieve. I want to build this type of product for my users and Ryan, this sort of echoes what you're saying a moment ago, which is, you know, you want to build a great product, you want something that people want. I think that if you step into the meetings and saying look like dan did, for example, well, here's what I think clarity can do, here's what I think its purpose in the market is, even if it's not all aligned with what you want to do, I think this is how big the asset is and really explain to people the vision that you would have otherwise sold to investors, et cetera. I think that has a ton of value. And if you can give yourself a forum to have that discussion, I think that's where people's eyes start opening up going ship, that there's more here than I would have seen that face value.

Ryan Rutan: Yeah. And I think it's important to and from the, from the buyer's side, right? Being able to clearly illustrate what the value of the asset is to you is really important because it starts to shed some light on, on, you know, how you're going to come to that point of agreement. Because as you said before, as somebody who wants to sell a business right there, maybe somebody, somebody listening right now is probably thinking, oh, cool, I'm gonna sell something to startups dot com and I hope that you do, because that will mean that we found some real value. What you've got, What you don't understand is our roadmap and how that fits and what the value would be for us and the value of a company. And I think this is where it gets really interesting, right? So the value, when you're establishing a value for an investor may be nearly the same value for all the investors because they're looking at a cash in and cash return, right? But when you start to look at the value, two different acquirers, there can be a huge disparity, right? Because it depends on the size of the audience that they already have, that they can bring to bear against this new product or service or the quality or pain of the problem that this is going to solve when they acquire this company and there can be a huge delta from one acquire to another in that regard. And I think this is something else that people forget. It's sort of like, well the value of the business is this cash flows that that it does this All right. So here are the mechanical values in my company and that's not necessarily what the acquirer is looking at and how they are doing the calculus on that problem.

Wil Schroter: Absolutely. It's just one vector. And if we're talking about a progression, I think this could be helpful for some of the founders out there to understand a progression on how you can build towards your exit plan with your partners. The first step of course is identifying folks that you think could be a worthy exit component. Now that said, having some way to do active business with them or former relationship with them is incredibly helpful. Right? Ryan, you mentioned your competitor, right? You know, we have relationships with a lot of our competitors, right? Uh, you know, some of the, some of the companies that actively compete with us, like I have dinner with them and their wives, right? You know, it's, uh, because at the end of the world as people and you know, we enjoy spending the time together and I love other founders and we give each other shit about how our companies are performing relative to each other. But if you can have a relationship with folks in any capacity, I think it's a, it's a real win. But from a progression standpoint, here's the way I've always seen it. And this has been pretty consistent. The first thing was identifying who those people might be right. You'd be surprised at how few founders have done that. The second step would be then to reach out and come up with a reason to have any kind of relationship with some of those folks Now, ideally it's, it's a working business relationship, right? It's something, hey, I'm gonna call this company, I'm gonna always use google because they're kind of amorphous. But I'm gonna call google. I'm going to try to get a relationship and I'm going to try to do something where we can work together. It could be really lightweight. It could be, we, we announced each other in our respective newsletters. I mean, honestly sort of doesn't matter. You want to just establish some foothold within the organization to have a reason to really get to know each other.

Ryan Rutan: That's exactly right. You've got to have some, some ground to build from, right? And it really doesn't matter to your point, how lightweight that is once you have that. And again, I think that it needs to transcend the personal level, Right? So it can't just be, well, I know this other guy and he's in my town or he's in my industry or whatever and we've become friends. That's great too. But I think that your point around needing to make it some type of active, even a very lightweight working relationship goes a long way because that's where the companies start to add value to each other. And that's where for me, the the genesis of the opportunity for acquisition comes from.

Wil Schroter: Okay, well let's build on that. So I think once you start to build a little bit of a working relationship and at its core, we're always talking about trust. At that point you start to open the discussion where you go a little bit more open kimono with them and you say, OK, we've done some things together. Hopefully, maybe even they're not even successful yet. What are you guys trying to accomplish? Right. What are your internal goals that we can maybe help with? And if if you start to really understand the company, what are some of your challenges internally? nine times out of 10, what's preventing them from moving forward with you has nothing to do with you, right? People forget that companies aren't just these, you know, kind of one dimensional faceless organizations that just operate like a machine. They're filled with a bunch of idiots just like us all trying to get stuff done. Usually poorly, especially in a big company. And what you'll find out is, oh, you know what our goal right now is to acquire more types of users like you have, but marketing won't release more budget for us to do it. So we can't move forward literally has nothing to do with whether your products very good. It's because some, some random dude in marketing didn't allocate the budget. Yeah, right. What you need to uncover with each of those relationships is what their strategic goals are and what's preventing them from moving forward on those. And often it's internal stuff that you can't fix right away. You don't have a handle on. I can't tell you how many times we've talked to a founder. Uh, let's say that a company we wanted to acquire. But it turned out that we couldn't move forward on the deal because some random investor had a preference in the deal that wouldn't, you know, let the deal move forward or there's some bizarre partnership agreement. They had tons of ship that unless you knew the company intimately you'd never be able to unpack no idea or more importantly address. Right? So again, we talked to the top of the show Ryan about this concept that companies are bought, not sold. And that by process has to do with all these different things falling into place at the right time at that company to even have that conversation. Our job as founders is to get into that conversation. Our job as founders is to find out what's happening inside that company, What they're trying to achieve, what's breaking down inside that company and figuring out where we fit. Yeah,

Ryan Rutan: yeah. And often, you know, it's, it's interesting, but you, you touched on something there that that I found particularly interesting in a couple of our own acquisitions and that's where there are things that they're trying to accomplish internally that they can't right. And that may seem like a weakness to the founder of the time. But for the acquirer, they may go, hey, we've already got that piece figured out so we can immediately drop in and, and and add value. This is the acquisition analog to smart money, right? Where you've got an investor who brings a huge network or business relationships you can immediately benefit from or some other leverage beyond the cash. And, and this is often the case that can only come about when the acquire has that context and they can only have that context through a relationship where there's incredibly kind of open and clear communication. Um, and that just comes back to, you know, that we talked about this in at least one other episode, We're talking about storytelling and the importance of that and the importance of being able to provide that context because that's where these tiny little connections start to form, right. These little synaptic connections where all of a sudden things start firing across from company to company and you start to realize the strategic value in one another. And that again, like that's to me that's the fertile fertile ground for the opportunity for acquisition.

Wil Schroter: Yeah. And I talked about the startup, looking at the big company, let's say that you're trying to acquire you as this nameless Faceless one dimensional company. It works the other way to if the company trying to acquire you only knows you by your domain name and who the name of the Ceo is. That's not a relationship, right? They need to know that you're a good person that that you've got a good team that they'd really enjoy working with. If you get the good fortune to bring you and your team into some discussions with their folks. So now people know people and now now those people will open up and say, man, we have no idea how to fix this problem. Right? If you guys could come in and help us huge opportunity. I watched this happen firsthand Numerous times when when I was in the agency business, you know, we ran a large interactive agency in the 90s at a time when no one knew what the funk they were doing, right? All these massive companies and most people hadn't heard the word internet yet. And so what we would do and folks that are in consulting or the agency business would be very well aware. We would do anything we could to get our teams of folks on site at the client as much as possible and some pieces actually taking desks and working

Ryan Rutan: in the embedded, embedded resource

Wil Schroter: to go native. Right? And and here's why, because if we were fully reliant on our clients to determine what the opportunities, let's say in the internet realm or at the time we're asking people who have no business in the internet to begin with, to make huge big leaps to figure out what they should be buying in this internet world, right? Wouldn't it be a lot easier if we put our experts on their team to be asking all the questions, you know, during lunch breaks of, hey, why aren't we doing this or why aren't we doing that? And more importantly, figure out actually why we're not doing it right? And it would be like, oh, by the way, this is an actual response that came up numerous times because Jeff, the C. T. O. Doesn't know anything about html javascript or you know, whatever, you know, lightweight language was, was big at the time. This is like mid nineties and so he's kind of afraid of it. Holy sh it, that's why we, that's why

Ryan Rutan: we're not, we're not moving

Wil Schroter: forward because he's afraid of his job.

Ryan Rutan: Dr. Jeff away from his AS 400 and that's exactly

Wil Schroter: what it was. Yeah. Yeah. And so uh what we learned was we weren't losing business or again, let's let's tie this back. We were not getting a deal done or an acquisition moving forward because our product wasn't good enough where we didn't raise enough venture etcetera. We weren't doing a deal because we had no idea what was happening inside the very companies were trying to sell to. Yeah. So the goal is to make that happen to start with relationships and start a dialogue where you just simply start asking, hey, what are you guys trying to accomplish and where are you stuck right now? You'd be amazed at how how many people will just flow at the mouth the moment you ask those questions and dying to tell you.

Ryan Rutan: Yeah, well there's there's a couple of specific scenarios under which these relationships become extremely important because there's there's often this misnomer that our misconception that a transaction is just a one time kind of thing, right? You just you you go that we sell the company and then we wash our hands of it and we never have to worry about each other again. Um And you and I both well know having been through this a number of times and having some deals that resemble these types of scenarios that's not often the case, right? It's it's often not just a cash transaction right? You may be doing something like for example, an aqua hire, right? Where you, where the relationship with that person is actually a huge piece of the deal. But even if it's not an aqua hire, there may be a turnkey period. And so the relationship and the understanding of that individual is really important. You don't want to turn key with somebody you don't want to work with or somebody that's not going to do a good job of the handoff. Somebody has already checked out. And so understanding what their motivations are, what their challenges are and whether or not the help that you provide through the acquisition is going to get them over that hump and help them help you to be a great acquire the other side? And that's, that's us as acquirers looking at at the existing founders but flip that around and let's say you're doing an acquisition, that's not all cash, right? You're doing a cash and stock, meaning that that founder who's selling their company has to have some faith that you as the acquirer are going to drive this thing to a higher level of success and help them leverage the investment that they're now making in you through selling you their company right? And without a relationship, how in the hell could you possibly parse that?

Wil Schroter: Right? Right. Exactly in mind you, there's something around timing that I think is really critical to talk about here. The probability that everyone's going to want to buy the moment you're ready to sell. We talked about this a moment ago, but I want to bring this up again is so unlikely. So as founders, if we're thinking about, hey, this thing might get sold. We basically have to prime the pump for what might be years by the way with multiple parties in hopes that we might sync up with one of their, their, their by moments at the time they're ready because they're not just infinite companies don't just sit around and say, we're willing to buy companies whenever we feel like it in these markets and we'll just pull the trigger whenever it may sound like they can. But the internal politics don't really allow for that, right? There's so many things that have to happen. The only way this works is if you get on folks radar so that once the stars aligned, you're actually in position to do it.

Ryan Rutan: Yeah. And that totally makes sense. You know, if you're in a position where you're thinking like I want to start now, but let's, let's, let's back up for just a second and let's get, let's get a little heretical because this is probably not something that most of the audience is going to align with immediately. What if you don't want to sell.

Wil Schroter: Yeah. Imagine that,

Ryan Rutan: right? Like what happens in that scenario and, and can that scenario exist? What are the conditions for it to exist?

Wil Schroter: Well, let's divide it into two camps. Let's talk about your campaign is you have the option to not sell, right? Most likely you own the whole company or be you don't have the option to hold on to it, in which case you have to sell, which means you have any stake holders that are breathing down your neck, investors, shareholders, et cetera, that need to get liquid on this company, right? So if you, if you're in a and you're like, hey, I don't need to sell, by the way, pretty strong position to be in.

Ryan Rutan: Yeah, it's

Wil Schroter: fantastic, right? Because again, maybe the company becomes just a cache engine and you're taking distributions forever and it's just an incredible place to be right. Uh, you're in the, the rarefied air of folks like base camp or mail chimp, which is on the money printing business, right? And you get to run that path right? If that's your problem right now, you're probably not listening to this podcast. What we're probably talking about is, is the other camp, which is, I have stakeholders that, you know, need to get liquid at some point, I det what have you, but I just don't really want to sell this thing right now, those folks are expecting you to have an exit plan, right? Because they'd like to have an exit plan, but just for what it's worth. I think we should just touch on this for a second. There's different ways to exit the business without selling it, right? And I'm talking about buying back the stock. I'm trying to remember. I think it was wisteria that did that. I can't remember if you google that whiskey A W I S. T. I A who did a massive buyback, which was really interesting. I think that there's an opportunity for folks if if they don't want to sell, even if they're saying I just, I don't want to be worried about this ship right now, right? I just want to go and build my product. Ryan. I think you'd agree. That's not a bad place to be like, like if you just want to go heads down, right? You were talking about that earlier. Like maybe that's the right move.

Ryan Rutan: Yeah. If you're, if you're in a position where all you're worried about is just building that better and better product and you're enjoying doing it and it's providing you with whatever resources you need, whether that's time, money, whatever it is for your life is the founder, then you may be in that position where you're saying like, look maybe I could sell maybe I don't want to, I don't need to and I have the ability to avoid doing so should I choose to uh yeah, wisteria actually did something really interesting. So they took on debt as a company, which is something you won't, you won't hear of a lot of companies doing just like Super, you know, happy about taking on debt. They were quite happy to take on debt. They took on like it was $17 or $18 million, I don't

Wil Schroter: remember exactly

Ryan Rutan: Yeah, $17, $18 million buyout, of their existing investors, the ones that were pushing for an exit, I don't know that they bought all of their stock back. but they bought out everybody who was making noise about wanting to push for an exit and in doing so took on debt, which they have to service, um, but are able to maintain and run the company and not have to worry about exiting right now because they're just working on building a great company.

Wil Schroter: You know, when we did our acquisition, some of those we did with all cash, some of those who did cash and stock, but with those that we did some stock deals with, we have folks that are essentially shareholders in our company. Uh, and yes, they ask us all the time. Those folks are my friends, you know, uh, you know, so we're at dinner and they're standing willing to sell this damn thing. We, uh, you know, we'd love to see some money and, and I always give them the same answer. I said, I would love to see it even more right as a shareholder in the company of myself, I said, but well, here's what I say, I said, it's not that we don't want to sell the company, you know, we don't hate money. It's just not time to sell the company and and then then they'll invariably ask, well, when is it going to be time to sell the company? And I always tell them the same thing when people start calling us with amazing offers, that's kind of what it comes down to. We have relationships and just in everything that we talked about with, all of the folks that would have an interest in us, but our focus, I think is the right focus, which is, we're just heads down building the product, increasing revenue, increasing what's essentially value. And we believe that we've already established the relationships when the stars align that the folks we've established relationships with, align with the amount of value that we've created at a price point that we care about, then a deal gets done right short of that. There's not much to think about. Keep our heads down and keep building the product

Ryan Rutan: right? Yeah. We've already talked about it deciding you want to sell, isn't going to create buyers correct, deciding that you don't want to run the company anymore. Same thing right? Like you're not gonna all of a sudden generate buyers because you're tired of running the company right? Building a great company with a great product, having those alignments with, with good partners, doing everything you can to understand their businesses and help them be better and better at what they do, Having some insight into the strategic alignment. That's what creates the events. That's what creates the opportunity for the events, right? This isn't, isn't quite like making a fire where with enough friction flame will start right. So many more factors have to be true. And so it's just about, you know, it's like any relationship being the right person, doing the right things, being involved with the right people and then hoping that something else comes out of that. But it's not a given.

Wil Schroter: Yeah. And, and so to reiterate, I don't think it's a matter of having an exit plan per se. I think it is a matter of connecting with the folks who in exit could be likely with some day, but being constantly connected so that when their stars align you're in the right place to have an exit.

Ryan Rutan: That's a wrap for this episode of the startup therapy podcast. This is Ryan Rutan on behalf of my partner Wil Schroder and all the startups dot com family thanking you for joining us and we hope you'll continue to join us. Be sure to subscribe rate and comment on ITunes or wherever you love to listen to startup therapy, you can find all of our episodes at startups dot com slash podcast. If you're looking for more amazing resources to launch or grow your startup, be sure to head to startups dot com and check out

Wil Schroter: startups unlimited.

Ryan Rutan: It's everything we have to offer from our online university to our amazing community of experts and founders and even all the tools we've built like biz plan, fungible and launch rock. It's everything a founder needs visit startups dot com slash begin that startups dot com slash b e G i N. You'll thank me later.

Copyright © 2024 LLC. All rights reserved.