David Crow has a thoughtful post about how startups need to think through their exit strategy in order to make smarter decisions along the way to make it happen.  He talks about how he’s surprised that almost every startup he talks to has a plan to get acquired by one of the big guys.  Here’s an excerpt:

When I talk to startups everyone seems to think that acquisitions
are a dime a dozen. That even based in Toronto, Montreal, Ottawa,
Waterloo that they are prime acquisition targets for Microsoft, Google,
Oracle, Cisco and other Valley companies. Which surprises me! Sure all
of these companies have done Canadian acquisitions, they are the
exception and they are done for very specific reasons.

While I agree that successful tech IPO’s are rare (especially right now) and that a venture-backed enterprise must have a realistic exit strategy, I also think that the focus on exits at the very early stages of a company can be an innovation-killer.  Particularly when it stops companies from thinking about the bigger picture of how they might really disrupt a market.

As a consultant, I’ve had a chance to talk to a large number of startups here in Toronto.  One of the things I find really frustrating is how few of them have a longer term vision for the company.  Most of the companies I talk to have a product idea.  While they can certainly see their product growing and getting popular, the “vision” for the company seems to end there, with the obvious ending being, “…and then we get acquired by a big company.”  This happens so often I worry that some of these companies actually started with a dialogue around “so what does Google want to buy and how can we build that?”, instead of insight into a key customer problem or an inadequately addressed hole in a market.

Setting out to build a company to be acquired, I worry, stops them from thinking bigger about how they can potentially transform the markets that they are in.  A VC said to me recently “Lots of folks come in here with ideas that make great products, and decent businesses but not great companies.”  A great company takes vision.

Are you just a “vendor” to your customers?

When you work at a big company you can clearly see how important a company’s vision is to customers, particularly larger ones making big ticket purchases.  A half-million dollar software purchase is going to get amortized across at least 5 years (if not more) and customers want to know that you aren’t just building products for today but that you understand the future of the market.  The key word here is “market”, not just the future of your own particular product.

The CMO at my last job told me a story about how shortly after leaving IBM to join a new company she had a meeting with the CIO of a key account.  At one point in the meeting the customer said “I talk to a lot of vendors like you.”  She was stunned.  She said, “He called me a vendor!? Could you ever imagine being called a “vendor” when you were at IBM?”  Indeed I could not.  Not every company loved us but at IBM we weren’t some “vendor” trying to squeeze our monthly PO out of our customers – we were working with the company at a strategic level.  Customers weren’t just betting on our products, they were betting on our view of the future of technology as it related to their businesses.  Oh and by the way, they were willing to pay a premium for that.  Vendors?  Customers negotiate hard on price with those guys because at the end of the day, vendors are replaceable.

Ability to execute

The trick for startups of course is that even if they do have a compelling vision, they need to be able to realistically map the steps that get them there.  There’s a reason those Gartner magic quadrants have vision plotted against ability to execute.  One without the other doesn’t count for much.  But just because you’re small doesn’t mean you can’t find a way to punch above your weight. Picking a starting target market where you can dominate and then use as a launchpad for other markets is key.  Finding the right partners and/or sales channels that can increase your reach is also important.

Startups get acquired when they cause pain

So coming back to the question of exit strategy.  In my experience (I’ve been at companies that have been acquired 3 times and have been on the acquiring side 4 times) the main reason companies get acquired is because they are causing the acquiring company pain.  They’re stealing customers, they’re causing customers to re-evaluate the status quo, they’re slowing down the buy cycle for the big guys.  In short, the startup is causing such pain that the larger company is willing to pay some big dollars to make it stop.  Trust me, a new product in the market doesn’t cause IBM pain.  A company with a new vision for the market that customers are interested in is another story entirely.  Get the attention of your customers and the market takes notice.

None of the companies I worked for when we were acquired started out trying to build something that the acquiring company wanted to buy.  Just the opposite – we were trying to put those guys out of business because we believed we were the better choice for customers.  Similarly, on the acquiring side we bought small companies for innovation, for a way to help us own the future in the minds of customers.  We didn’t purchase “vendors”.

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