Part of the mythology of Silicon Valley is the dedicated founder who drives the company to a blockbuster IPO. In fact, startups are 16 times more likely to be discovered.
It’s not an outcome that’s often discussed, either.
“It’s one of these things that a lot of people don’t really talk about. In Silicon Valley, we always talk about IPOs,” said Naveen Rao, VP of AI at Databricks and a two-time co-founder, on stage at TechCrunch Disrupt 2024 on Thursday.
That silence can make a difficult process even more challenging for founders. “I’m very happy that this is being talked about as a topic in the forum, as a real method and a real result for the founders, rather than the hallowed, insider secrets of the investors who enter the deal,” said Kamakshi Sivaramakrishnan, the head of Snowflake’s data clean rooms and a two-time founder.
“Acquisitions are statistically more likely than IPOs — arguably more successful in many cases than IPOs — and certainly something founders should be mentally and physically prepared for. It’s a journey of endurance,” he said.
Rao and Sivaramakrishnan each built and sold two companies: Rao sold Nervana to Intel for $408 million in 2016 and MosaicML to Databricks for $1.3 billion in 2023. Sivaramakrishnan sold Drawbridge to LinkedIn for an estimated $300 million in 2019 and Samooha to Snowflake for $33 million.
Both founders said they did not start their companies with the intention of selling them, but when the right deal with the right company comes along, it makes sense.
“I personally believe you should build a company and try to make that a real business,” Rao said. “If something comes up, it’s good. If you try to convince yourself to sell the company, it will always bend that way, like you are always being sold. And I think the result will never be that good.”
“You hear all these stories about ‘good companies are bought, not sold’ and ‘you have to keep going and persevere,'” Dharmesh Thakker, general partner at Battery Ventures, told the audience.
“The truth is, most investors have a few hits that make 100x and they pay the fund. Some of it, whether you make 1x or 0.5x or 2x, it doesn’t really matter. What we’re trying to do is, ‘Okay, if things aren’t going to be -50 or 100x, let’s find a good home early in the cycle,” he added. “It’s very easy to sell a company when you’ve raised $10 million or $20 million and you can still get success from founders and investors and it’s done. It’s hard when you have to raise hundreds of millions and find out things don’t go well.”
To decide when it’s time to soldier on and when it’s time to sell, Thakker analyzes a company using a three-point framework.
First, you analyze the product: Is it something customers like and use? If a company is struggling to gain market power, it may warrant a pivot, or it may have to cash out.
Second, you look at the sales and marketing cycle of the company. If the product isn’t moving or if it’s challenging for the sales team to close deals, that could be a red flag.
Third, Thakker looks at the balance sheet. If the money and the railroad are running out of time, that’s a clear sign that it may be time to look for a suitor.
“I was lucky enough to be an investor in MongoDB and Cloudera, Databricks, Confluent, Gong and many others, where every time we had an offer to buy, we looked at the framework and said, Are these three things true?” If the answer was yes, the Battery team encouraged startups to remain independent.
Sometimes, founders needed a moment to “refresh” and “refresh,” he added. “In almost every case, the outcome was much better than selling the company.”
But that’s not always the case. If two of the three items in Thakker’s framework are negative, it should be reconsidered. Maybe customers bought the product but don’t use it. Even if it fits well it doesn’t sell well. In both cases, the company can keep trying, but it will burn a lot of money in the process. “In those situations, you have to be very open-minded, and the sooner you do it, the better off you are,” Thakker said.
When it comes time to sell, Thakker encourages founders to negotiate a deal that is fair not only to the founders and investors, but also to their employees. “Let’s do good with the workers,” he said. “Most of the time, a large part of the purchase is for the maintenance of the equipment of all the employees. And of course, if you do that right, many of those workers come back, start a company, and you sponsor them a second time and a third time. And the second and third time, there are better results.”
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