Kevin Halter

Landing The Plane: A Necessary Choice For Many Startups How many Founders does it take to land a plane? None, they'll just pivot to a helicopter ride-sharing service. Joking aside, there’s nothing more fun than being part of an incredibly successful Startup. The relentless ambition of passionate teams doing everything they can to ship code and scale is energizing. And for most Startups, their goal is to join the ranks of “real” companies by growing large enough to eventually execute a well-received Initial Public Offering. Having their own ticker symbol etched in the annals of Wall Street drives many Founders, and as importantly, IPOs are a critical source of investment returns for the VCs that fuel the startup ecosystem. Without IPOs, VC math doesn’t math! However, reality is sobering. Only a few percent of all Startups backed by Tier 1 VCs achieve the scale required for a successful public offering, and the numbers are much, much worse for the broader Startup ecosystem. So, what happens when it’s obvious that a Startup isn’t on a trajectory to capture hundreds of millions of dollars of high margin revenue which would allow them to go public? The unfortunate truth is that once it’s clear that a Startup is going to struggle to achieve escape velocity, they need to work with their Investors to “Land The Plane.” This is typically very tricky because navigating a safe and controlled descent towards a positive outcome isn’t straightforward nor guaranteed. It often involves finding a strategic buyer that recognizes the value in the Startup's financial performance, technology, customer base, or talent pool. It often devolves into very heated debates about how to distribute a pool of money or stock that’s less than everyone is happy with. And it often requires a Founder to internalize what they’ve built and what their options are with crystal clarity rather than through their normal “eternally optimistic” lens. And given the “Grand Reset” that’s happening within the Startup ecosystem (which I wrote about here: xitter.gq/fintechjunkie/status/1… ), everyone is embracing the reality that the ZIRP environment funded too many Startups that will never achieve escape velocity. The implication is that there are a lot of planes in the air right now that need to be guided to safe landings or they’ll most likely run out of fuel and crash. STEP 1: AGREE TO LAND THE PLANE While not the original destination, a strategic acquisition can be a win for a Founder and for a VC, even if the financial windfall isn't astronomical. Internalizing this is important for all parties because it takes alignment and coordination to pull off a safe landing. Benefits include: Payment For Value Creation: In many cases, a strategic sale translates to some form of renumeration, whether it be in terms of cash or stock. Even if the financial returns aren’t great, any cash returned to Investors means they can return it to their LPs which is a major driver in raising additional money from them in the future. And if the payment is in stock, hopefully there will be some return in the future that offsets the time and money poured into the Startup. The Mission Can Continue: Acquisition by a larger company often injects valuable resources, expertise, and market access that can accelerate a Startup’s mission. The startup's technology, service or product could gain instant exposure to a wider audience, potentially amplifying its original mission far beyond what it could have achieved independently. Founders witnessing their creation flourishing within a larger ecosystem can be incredibly rewarding, even if they're no longer “at the top of the food chain”. Employee Success: A strategic buyer is likely interested in retaining the Startup's talent because these are the people who built what the acquirer is coveting. Many times, the Founders and Employees end up with great jobs at the acquirer and no longer feel the pressure of having to outrun the cash burn of an underfunded Startup. Employees are typically offered opportunities for growth that also come with great pay packages and real stability. Founders who prioritize their team's happiness can find solace in knowing they've secured great jobs for the people who believed in their vision. And it’s common for Founders to use the integration period to breathe, learn from past experiences, and potentially prepare themselves to build something even bigger. Building a Strong Reputation: A successful acquisition, even at a moderate valuation, can solidify a Founder's reputation in the VC ecosystem. It demonstrates their ability to build something of value, attract interest from Investors, and navigate the complexities of a sale. This positive track record positions them for future success when seeking funding for their next venture. Investors are more likely to back Founders who can navigate “Landing The Plane” instead of “Fighting To Remain Independent” when the writing is on the wall that it’s time to sell. STEP 2: PREPARE FOR A SALE Preparing to sell a company isn’t as easy as it sounds. It’s not as simple as hiring a Banker and putting together a data room. Building awareness about what a Startup does within the prospective buyer community and cleaning up how it operates are critically important and time consuming steps in most successful M&A processes. This means that the time to sell a company is 6-12 months before it would run out of cash. Cutting it too close will almost always lead to a fire sale, an acqui-hire (with no value exchanged for the Startup’s assets) or a no-bid. Building Awareness Within The Buyer Community: Most successful M&A transactions occur between known parties. If your first outreach to a potential strategic buyer is a Banker led M&A process then the odds of completing a transaction with that buyer is extremely low and diligence will be extremely long. Many times the buyer is a company that already interacts with the Startup in some form or fashion or has already expressed interest in the past. If the Investors and Founders of a Startup determine it’s time to sell, then the first step is to take stock of who already knows the company and whether or not they’re likely buyers. The second step is to determine who knows other potential buyers and put a plan in place for introductions in advance of launching a formal process. This can take many months or even many quarters depending on how the potential universe of buyers makes decisions. So starting early is critically important. Cleaning Up How A Startup Operates: The truth that nobody in the Startup ecosystem wants to internalize is that most Startups are actually liabilities, not assets. If a Startup is burning money, then the cash-burn of the entity is a liability it wants a buyer to assume. If a Startup has a tech stack that doesn’t seamlessly integrate with a buyer’s tech stack, the integration and cut-over costs are liabilities that the Startup wants the buyer to assume. If employees would “die before they’d work for a big company”, then the acquirer is being asked to absorb the disruption of near guaranteed attrition. Not all these issues can be solved before kicking off an M&A process, but the ones that can be addressed should. Reducing the burn of the entity is CRITICALLY important so making cuts to G&A and other “optional” areas should be done before pulling together a forecast of future performance. And talking to the leadership team about “who’s in and who’s out” can help negotiations down the road, especially if a Founder can get commitments from their team about the value of putting in “two years and one day” for the sake of everyone involved. STEP 3: RUN AN ORGANIZED M&A PROCESS Books could be written about the nuances how to set up an M&A process for maximum odds of success, but the high level generic advice consists of running a very organized process with a clean data room and financials, being prepared to tell a compelling story about the value of what’s been built, being realistic about what the real value is to each potential acquirer, and doing everything possible to get more than one buyer interested to generate leverage. Conclusion: “Landing The Plane” may not be the glamorous IPO envisioned by Founders and Investors, but by no means should it be considered a complete failure. It signifies the ability to internalize reality, adapt to market conditions, and secure some outcome for all stakeholders. Ultimately, a successful landing paves the way for another journey in the future. And a successful landing could return cash to and free up time for Investors to seek out the next potential rocket ship.