For startups doing even modestly well, contemplating an exit can feel like the opposite of the grit and determination that pervades founder lore. Investors and advisors back that up, often encouraging founders to just focus on building their business without spending time on endgame planning. It’s good advice in many cases: conducted poorly, exit talk can be extraordinarily distracting. Strategics may dangle the idea of a merger in order to pump a team for information. And everyone fears that a near-term exit may foreclose on a larger one later, even if both would be lifechanging for founders.
Even so, the advice to ignore strategics is largely wrong, even for teams not planning to sell any time soon. For one thing, building strategic relationships can have any number of outcomes, M&A only being one. Focusing on those relationships is not the same thing as planning for a near-term exit. And even if it does catalyze an exit down the road, the most successful strategic relationships are years in the making, much longer than a startup's ability to predict its own future. In an upside scenario, strategics can deliver non-linear growth via partnerships or other means, and perhaps ultimately allow you to capture the value you've created. In the downside case, they can be a critical lifeline that can still be lifechanging for you and your team.
Over 90% of successful startup outcomes are acquisitions. Regardless of whether an exit is 6 months or 7 years from now, the quality of that exit is highly influenced by a years-long process of relationship development. Because of the limited universe of acquirers, those relationships could mean the difference between a great outcome and everyone going home empty-handed. The reality is that founders that deliver great exits start laying the groundwork for one long before it's obvious that they should. If founders wait until they feel like they need more options on the table, it’s often too late.
Building strategic relationships doesn't mean you're selling now
I've never quite understood the emotional texture that often accompanies conversations about strategic options. For companies doing well, it can be treated as a contaminated topic, not to be touched lest we send signals that we're admitting some form of defeat. Depending on their place on the cap table, investors may cheer on that mentality (or at least won't discourage it).
The backward-looking story of great exits is often different. I've heard dozens of versions of the same story: when asked how a good acquisition occurred, an investor will say some version of "oh yeah, the CEO was really smart about strategics early on. That ended up mattering quite a bit." But that fact often doesn't make its way into the advice given to the next generation of founders.
The fact is that strategic relationships often impact the quality of an eventual exit, but building those relationships doesn't mean that you'll take the first offer that comes along. Truly great deals are often preceded by several lower offers separated by months, each rebuffed by the startup. That game can take years to play out, and it's often held together by strong relationships, relationships that are sometimes only appreciated in retrospect.
Relationships could mean the difference between zero and a life-changing outcome
Now let's consider the scenario where things are going ok, but we don't see a clear path to an IPO. In that world, some form of acquisition is more or less the only liquidity event that makes sense. Once again, it's important to consider the relationship lead time necessary to make a difference. Unlike VCs, who can usually go from a first meeting to an investment decision within a few weeks, strategics need quarters to years to warm up to the opportunity your company presents. Without that lead time, the universe of potential acquirers dwindles dramatically, increasing the chance that the company needs to close up shop and the team goes home empty-handed.
As the adage goes, companies are almost always bought and not sold. Especially for companies that shouldn't be sold based on a multiple of revenue, an acquirer's interest is based on a deeply-held belief that your company is strategic. That level of conviction doesn't just happen. Some strategics can get there quickly, but more often it’s incepted and developed by the startup team over a long period of time. Any meaningful transaction sits on top of a foundation trust and alignment, for which there are few shortcuts.
For large acquisitions, strategic relationships are the glue that holds a long process together. For smaller acquisitions, they're often the reason an acquirer is at the table at all. Foregoing relationship development is inherently risky.
Timelines are much longer than most founders appreciate
From a startup’s point of view, it’s often hard to contemplate how slowly corporate machines move. Typical M&A timelines reference several months or more for a typical process – which is accurate, if we start from the moment a company declares it is for sale. Not included in that timeline is the long buildup of partnership discussions, executive one-on-ones and “coincidental” run-ins that have exposed key stakeholders to the company, overcome objections and set the stage for a successful process. By the time the transaction clock officially starts, the story is largely already written.
All of that takes time and intentionality long before a startup realizes it might be running out of money or the founders start running out of steam. The investment does not have to be large – a few hours per quarter will often do the trick. But it also cannot be rushed. Bottom line: if you might want to contemplate an exit within the next three years, the time to start building those relationships is now.
Relationship development has a host of positive side effects
An eventual transaction is far from the only reason to develop strategic relationships. While the effects are unpredictable, nurturing strategic relationships often has a host of positive side effects:
- Partnerships: relationships often start in the context of a partnership rather than a company for sale. While many conversations transition from one to the other at some point, some actually result in a partnership. Those partnerships can deliver nonlinear growth during a critical juncture in a company's lifecycle.
- Unearthing strategic intent: Pitching any kind of partnership, and listening closely to their feedback (or even lack thereof), will often reveal invaluable insights into the strategic focus and direction of the largest players in your space. That insight could impact your product roadmap, GTM motion or other parts of your business.
- Identifying power centers: Relationships with strategic partners often reveal the power dynamics within their corporate hierarchies. You learn the influencers, the allies, and the potential roadblocks. That map will allow you to understand how a company is likely to behave and its speed of execution, regardless of its strategy.
- Scouting for Talent: As you engage with a strategic, you also get an inside view of the quality of its talent. Identifying bad talent will identify areas where you may be able to out-execute them, and identifying good talent could uncover potential hires.
Of course, it’s certainly possible to over-rotate and pay too much attention to other companies in the space. That can be enormously distracting, especially if it starts to dictate product strategy in anticipation of what a strategic might want. But if properly contained, relationship development can pay huge dividends down the road. Through the lens of the regret minimization framework, it’s a no-brainer that often goes overlooked by founders more focused on their day-to-day.
So how do you actually approach those companies? Check out this guide.
