Want to Build a Company That Will Sell Someday? Consider These 7 Questions from the Start

I have often suggested to starry-eyed startup founders that they spend less time thinking about selling their future company and more time acquiring and understanding customers. Don’t be distracted by distant rainbows and pots of gold. Focus instead on fighting through the fog right in front of you. As Paul Graham, founder of Y-Combinator, puts it, “The way to succeed in a startup is to focus on the goal of getting lots of users, and keep walking swiftly toward it while investors and acquirers scurry alongside trying to wave money in your face.”

(Wall Street Journal, March 5-6, 2011, p. B1)

But it’s hard for founding teams not to get excited about Amir Efrati’s piece on Google’s growing thirst for acquisitions in this past weekend’s Wall Street Journal. Efrati notes that Google spent $1.8 billion on 48 startups last year (up from a paltry $92 million on 10 deals in 2009) and quotes Google’s VP of corporate development, David Lawee, as saying the company will “continue to be aggressive.”

If we subtract out the biggest deal (AdMob, worth a reported $750 million), the average disclosed deal size for the other 47 startups Google acquired was about $22 million.  That’s chump change for company like Google, and that kind of transaction is well within reach of many young tech ventures. Given how little it costs these days to launch a technology firm, maybe it’s not so crazy for founding teams to be a bit starry-eyed.

Chump change or not, $22 million is still a lot of money where I come from.

Efrati’s piece on Google resonates with me because it underscores what I heard last week at the Southeast Venture Conference in Atlanta, where the buzz asserted that Google’s acquisitive appetite is just a slice of a much larger trend. Panelists at the conference pointed out how many massive companies have been sitting on cash and are hungry to ramp up M&A activity through this year and beyond: Dell, Facebook, Twitter, Cisco, IBM, Apple, and Microsoft were all named as sitting on war chests and looking to strengthen through acquisition. This trend mirrors the uptick in available funding and deals from VC and private equity firms, angel groups, and commercial lenders.

If being in a position to sell your business someday is one of your startup goals (and that is an important “if” — I want to emphasize here that countless founders have built fulfilling and sustainable lives around businesses that they have no intention of selling), then it makes sense to factor this goal into your earliest startup iterations.  Here’s a quick list of seven early questions to keep in mind:

1. Are you growing your core customer base and delivering a world-class solution for their needs? This sounds obvious, but is worth emphasizing, as it is the heart of any valuable business — and a key to early stage viability. No compromises here.
2. Are you building a business that can operate without you at the center of it? Litmus test: Can you take a week’s vacation and know that all will be well with your business?  If not, what steps are you taking to move in that direction?
3. Are you building a strong management team that will be viewed as an asset by an acquirer? This is a key element to accomplishing #2, and is much more difficult than most founders assume. For many acquirers, the quality of management and technical talent on your top team will make or break a deal.
4. Do you know what kinds of companies (and specifically which ones) might someday covet your business (and why)? This list will usually include major partners and competitors, as was the case with Modality, a client based in Durham, NC, that was acquired by Epocrates this past November. Modality and Epocrates first got to know each other as project partners, building a strong vendor-client relationship that led to courtship and, eventually, to marriage.
5. Are you building a business model that will generate high-quality earnings, as seen from an acquirer’s perspective? Entrepreneur and author John Warrillow does a great job of outlining opportunities for shaping a business model that is attractive to acquirers, noting the value of recurring revenue, for example, and long-term customer contracts. Check out John’s blog and upcoming book for a solid approach to building a business model that is sellable.
6. Is your financial house in order? Are you putting appropriate financial controls in place? Are your books clean, audited, etc.? Establish this foundation early. The longer you wait, the messier and more complex it will get.
7. Are you planning to build a strong board of advisors or directors? In addition to the valuable role of keeping you honest and testing your assumptions about your strategy and business model, the right, well-connected board members can be invaluable in networking and scouting opportunities within your industry. At the end of the day, business is personal, and key doors are often opened because of trusting relationships. Find advisors or directors that you trust, and leverage their good will and relationships to get to know prospective partners.

The list is not meant to be exhaustive or in priority order.  I look forward to your comments — what have I missed?  What do you think needs to be considered up front to raise the likelihood of a successful longer-term exit?