“Worst case state of affairs we’ll promote to a bigger startup or public firm for about ~$1.5m per engineer.” Sure, this was the ‘fallback plan’ for a lot of crew within the web2 period and so they weren’t mistaken. Particularly within the early days of cell/iOS engineering, should you employed sturdy technical expertise into your early stage firm, you principally created an acquisition final result flooring. I used to be on either side of those transactions – shopping for startups for Google/YouTube and angel investing in prime quality technical founders. Typically you’d even get fortunate and obtain inventory within the acquirer, which was how I gained pre-IPO fairness in excessive development stars like Pinterest and Fb.
Beginning our enterprise fund Homebrew professionalized and scaled my insights into gentle landings. Acquihire potential completely isn’t sufficient in and of itself to justify enterprise funding (we play to win!), however in sure conditions buyers do discuss these items as constructive optionality. And through our first few years we leaned in to assist groups discover the suitable dwelling when it didn’t work out for them as an impartial firm. This produced two profitable intra-portfolio acquisitions the place one crew joined a bigger startup we beforehand seeded (Chime and Bowery Farming have been the consumers) and an entire bunch of different transactions. The proverbial win-win-win: founders bought to land their firm typically with some retention premium; staff bought job affords; and we bought capital again, that even when it wasn’t an influence legislation return, allowed us to recycle into new investments or the present portfolio. I’d say that for a small, two particular person fund we bought fairly good at this movement when wanted!
And now I’m telling you the world is totally different. Very totally different.
In 2023 with few exceptions acquihires are useless as we knew them. Nearly all of typical acquirers (giant and small) don’t have incremental headcount finances. Those that do, typically imagine they’ll rent from the open market with out the effort of an acquisition. Money is at a premium so it’s not going to cap tables (most popular or widespread stroll away from the offers with no dinero). In truth, generally acquirers are asking for the remaining money available from the startup so as to ‘zero out’ the wage burden they’re taking up [HW note: 99.9% of the time my answer is no fucking way]. And after they’re giving inventory to current shareholders as a substitute of money it’s at excessive 2021 valuations, buried beneath a choice stack.
None of this implies we’ve backed off serving to founders in these conditions, however we do attempt to set expectations with them and collaborate with the opposite buyers. My private rule of thumb is that to the extent there’s money or invaluable IP nonetheless within the firm, we have to guarantee that we’re good stewards of these belongings (per above, why I balk at giving up money in an acquisition the place there’s little bidirectional worth trade). However when it comes right down to the forward-looking time of the founders and crew – eg do they really need to go work on the potential acquirer – their alternative value and happiness is absolutely necessary. No founder ought to really feel compelled to enroll in 4 years of earn out distress simply to get their enterprise buyers a number of cents on the greenback.
Occasions like these name for considerably totally different methods, maybe shifting from the ‘firms are purchased not offered’ mindset (which could be very a lot true in conditions the place the startup has optionality or no less than aggressive affords). My counterintuitive suggestion is that extra founders ought to publicly announce they should discover a dwelling when searching for this final result. Put collectively a terrific submit or deck concerning the scenario, high quality of the crew, what they know the right way to do higher than anyone else, and why they’ve had hassle elevating further capital. Let potential acquirers discover you (who is aware of you would possibly even find yourself with some funding affords). It’s form of a litmus take a look at – should you can’t make the argument convincingly in public I’m suspect you’re going to in some way magically determine it out in a quiet, closed door course of. Not in right now’s market situations.
Downsides? Emotional I suppose. However actually, “this didn’t work out the best way we hoped” is the theme tune of startups so be a part of the refrain.
Giving up negotiating leverage with a possible acquirer? Once more, not likely on this market. The one manner you get to barter is you probably have a BATNA, and my POV is it will enhance that probability for 80% of firms on this place. So go discuss with a number of of your most promising relationships first, however don’t hesitate to go extensive while you’re not getting quick traction.
Some VC with an operations crew ought to go construct out the template for this – make it straightforward for founders and normalize this course of, eradicating any stigma. As an alternative of spending your final quarter of existence digging by way of haystacks for needles, construct a magnet, and pull the needles in direction of you. If over the course of the subsequent yr you see any Homebrew portfolio firm do that out, I’ll let you recognize! And good luck, it’s tough on the market.
