Exit Strategies Are A Distraction
Focus on Building a Company to Last for Years to Come
At many points in my eleven-and-a-half-year journey with HomeSpotter, I was pretty confident we would get acquired “in the next three years.” And such a mindset wasn’t beneficial to the company or me personally. Focus on building to sell had me overlook more essential questions.
I didn’t realize it, but prior experiences had primed me for this mentality. We sold the first startup I co-founded about three years after founding. I stayed at the acquirer for three years. Immediately after I left, I built a Facebook game. I sold it to a venture-backed company a short four months later. I had naively assumed this was the pattern I’d continue to follow throughout my career.
Shortly after that, I had an experience that nearly validated this assumption again. A co-founder of another venture and I were approached about that company getting acquired as well. The offer was generous, considering we hadn’t raised money and hadn’t demonstrated much traction yet. We quickly signed a letter of intent. And yet, the potential acquirer backed out several months later. It was pretty devastating at the time. I was rather sour about the legal bills we amassed too. Ultimately, it became a big demotivation to continuing on with that venture.
With years of distance, I’m grateful for having gone through this. I would never again assume a deal was done until it was done, which proved beneficial at several points in the HomeSpotter journey.
In our first significant wave of growth at HomeSpotter, periodically, would-be acquirers would approach us. I was cautious about each interaction. But most of those conversations quickly fizzled out because we hadn’t yet grown into my valuation expectations.
Late 2015 through 2017 was a challenging time. Growth flatlined on our first product, and I had to pivot and find a path forward. During this time, I had many moments of despair – wondering if we’d even grow back into the initial valuations we had raised at. I didn’t want to disappoint my investors. Frankly, I felt stuck.
Several very respected people (investors, prominent industry consultants, etc.) told me I should pursue a fire sale during that time. They saw the flatlined growth on our first product and thought I was wasting my time. Fortunately, I was stubborn and unwilling to settle. Seven years of pain, substantial portions of which were unpaid or underpaid, for what might have been little to no return to me personally didn’t seem worth it.
And ultimately, we made the right bet on choosing our second product to pursue. Significant growth started again, and we sold on favorable terms several years later.
As we were amid that growth, I allowed us to get partially distracted by an interested party for six months. Our new product’s technology was intriguing as a potential path for this party to scale their business. We partnered on a pilot project, which I believed had a trifecta of ideal attributes:
We were getting paid to learn and potentially improve our technology.
Beyond the interested party, the project was in service of one of the biggest firms in our space which could lead to bigger and better things.
There was a strong chance we would be acquired if the pilot was a raging success.
Instead, much of our staff and my time was diverted into what looked more like a services engagement. It was a good lesson on opportunity costs. Fortunately, we never got to the point of a term sheet allowing us to avoid the frustration of wasted legal fees or dashed dreams. And as it turns out, we were able to deepen our relationship with that other big firm in the space on our core products, so not all was lost.
At some point, I realized we would need to get bigger to be a more ideal acquisition target and drive a higher multiple. I closed an acquisition of another company in early 2019, making us a three-product company. At least a couple people that knew me thought this was counter-intuitive. “I thought you wanted to sell... buying another company seems to be going in the opposite direction?”
We were on a path for that bet to pay off. In late 2019, we retained an investment banker. We took a dual-track approach where we would consider raising money from private equity in a majority recap transaction or an outright sale to a strategic acquirer. While I had previously only considered selling, I had reached a point where raising a growth round from private equity seemed more appealing. Such a partnership would allow us to acquire other companies and drive up our revenue, profitability, and valuation multiple. And, if I could take some chips off the table at the same time, all the better.
We spent several months getting our CIM (confidential information memorandum), data room materials, and teaser decks ready to hit the road. We formally launched our process in late January 2020. We had lined up about a dozen interested parties, many of which were private equity firms and a few strategics. With confidence in our prospects, we set a bid date of March 13, 2020.
In case you’ve conveniently forgotten, the week of March 9, 2020, will forever be imprinted on my mind. The NBA shut down. Tom Hanks got COVID. The stock market was in freefall. Many were panicked about all the unknowns. And we went from a dozen parties that suggested they would put in a bid to none putting in a serious one literally overnight.
We quickly paused our process due to market conditions. Our attention shifted to weathering the storm in front of us. The whirlwind year of weathering that storm will be a topic for another day.
So that’s my brief walk down memory lane on potential acquisitions that weren’t meant to be.
In my career, I’ve been through many completed acquisitions now on both sides of the table. And yet, when I start something again, I will think far less about an exit strategy and far more about founder-market fit and being in it for the long haul. If I take a venture-backed path, I’ll be much more focused on TAM (total addressable market) than in the past. And if I take a bootstrapped approach, I’ll be much more focused on the path to profitability and positive cash flow.
Please tune in next week for my post on how our acquisition came together expeditiously and unexpectedly. Ironically, it was at a time I wasn’t pursuing a sale.
Special thanks to HomeSpotter investor Scott Burns for numerous conversations over the years on potentially pursuing a growth round of funding from private equity. The discussions were timely and productive.