Entrepreneurs often refer to their businesses as their baby. Both demand constant attention in the beginning, go through growing pains, and eventually—hopefully—become independent.
It’s understandable that just as it’s difficult for parents to watch their children leave the nest, it’s also difficult for founders to sell their startups after years of toil and worry. For startup founders in capital intensive industries and venture capital or private equity investors on the hook, there’s a lot of pressure to sell within a certain timeframe. After all, there needs to be a sale or IPO as investors want to see a return on capital in seven to 10 years.
But for bootstrapping entrepreneurs, the timeline and reasons to sell can vary. Sometimes it’s the desire to move on to another idea. Other times it’s burnout or recognition that the company needs a leader with a different skillset. It could also be some combination of all of the above.
Regardless of the impetus to sell, first-time entrepreneurs can end up missing their best window of opportunity because the decision process can be so wrapped up in emotion. First time entrepreneurs often struggle knowing exactly when to sell their business and end up holding on for too long.
That’s the experience Alexandre Douzet, currently CEO of Pumpkin Pet Insurance in New York, had when he worked at HotJobs, which went public and was then sold twice – first to Monster.com and then to Yahoo! – within the span of a few years.
“It was almost too easy and I kind of took that a little bit for granted,” he said. After that experience, he started TheLadders.com and stayed for more than 11 years before selling. He admits that he had a couple of opportunities to exit, but was so focused on growing that he missed out on both of them.
“I think we underestimated and had this idea, ‘we are not ready, we are going to grow and be much bigger,” he said. But “everything that goes up must go down eventually. When you are first time entrepreneur, sometimes you have a tendency to forget; you think that way up is only the direction,” he said.
That’s one mistake he made sure not to make with his second venture, Ollie, a direct to consumer pet food business, which he exited after four and a half years, realizing that the company needed expertise in food manufacturing and cold supply chain which he didn’t have.
Sometimes, surprise events put any thoughts of a sale on hold, forcing founders to hold on. That’s what happened to Lu Dong, founder of La Miu, a Chinese women’s lingerie brand that had raised $30 million, which saw years of hyper fast growth followed by three years of struggle.
La Miu, like so many other ecommerce brands in China, struggled after the ecommerce bubble burst in 2012. Within two months, the company had to let go of 200 of its 300 employees. Despite the difficult circumstances, the company broke even without outside capital. But Dong found that once that initial momentum is lost, creating growth is nearly impossible, especially in China. The company needed another capital injection but Dong found that VC firms were not interested in turnaround stories.
What eventually triggered his decision to sell was learning that he was about to become a father. Burned out by the pressure at work and the poor air quality in Beijing, he decided to exit the business and China.
“I was trying so hard to make sure our employees are protected, our suppliers paid, our customers are happy, the shareholders happy. I tried to take care of everyone. But I wasn’t taking care of myself and my family,” Dong said.
It’s obvious to say that the ideal time to sell a business is when it’s still growing. But knowing the ideal time to exit takes a bit of self-reflection and realism.
Shilpa Panchmatia, a London-based business coach and serial entrepreneur who has sold two business, sees a fair bit of denialism when it comes to entrepreneurs valuing their own companies.
“As an entrepreneur, as a bootstrapper, you're completely and totally in denial of how much you think your business is worth because you've put your blood, sweat, and tears in it. It’s often a buyer will value it very differently,” she said.
She sold her coaching company after seeing sales increase 70%, 143% and 230% over three years. But though she realized it was a good time to sell, it wasn’t easy to let go. “It was my baby grown to a stage where it needed further financial investment and further financial growth. I personally didn't believe that I had the skills to be the CEO and I didn't want to hire a CEO for it because it wasn't that large,” she said.
Panchmatia’s advice to those thinking about selling? Get systems and processes in place from the get go. That way, when it comes time to sell, “you've got your financial records straight, you've got complete projections ongoing, you've got manuals and policies and procedures to pass on, and you've got market intelligence, which you've built into your business,” she said.
That’s one mistake Munich-based Patrick Loeffler, who co-founded prepaid card company, givve, made when trying to sell his company. He was so focused on sales that he neglected other aspects of the business that proved vital to a successful sale, like having solid financial overview and projections.
“We always said, ‘a CFO is so expensive - we can’t do this’ but that was a mistake,” he said, opting to do the required accounting themselves. When they eventually hired an expensive CFO, they regretted not hiring one earlier. “If we would have had this kind of CFO before during our financing rounds, it would have been better,” he admits.
If you're planning an exit, you probably need an advisor.
Patrick Löffler, givve.
The other thing to do is starting preparing for a sale a couple years ahead. Douzet said he spent a lot of time networking, staying in touch with investors. He suggests that founders consider industry dynamics when thinking of potential buyers, adding that it’s not always obvious industry players. Sometimes companies in tangential industries may be interested as well.
Founders may also need some help. “If you're planning an exit, if you have not done it already three or four times, you probably need an advisor, especially when you have mixed shareholders because then the advisor can also help to keep everybody in line,” said Loeffler. After a successful pivot from B2C to B2B, givve was doing well but needed another capital injection to reach the next stage of growth. But while Loeffler and a dozen or so investors agreed to find a large, strategic buyer, they struggled to come to a consensus about how to go about it. Eventually, after much searching, they worked with an advisor at a boutique investment bank that helped them exit.
Most startup founders will probably tell you – the process of selling a business can be draining, especially the first time. Loeffler’s advice? Once you start, see it through. “It sounds so simple but you have to be sure. If you have started it, you have to make up your mind and go through to the end,” he said. “If you go through hell, keep walking.”