Thread by @epaley

“I don’t see who would acquire this startup.”

I’ve heard this excuse from VCs explaining a decision to pass on investing in an atypical market. It’s usually a diplomatic way to express a deeper concern about a business, and it’s often a mistake. Here’s why:

/1

We heard this all the time when pitching our startup, Brontes, in the dental industry. Turns out we and all of our competitors had meaningful exits. Brontes itself had 5 bids to buy the company in an industry that most VCs believed was devoid of buyers.

/2

If a startup creates a product & builds a business around it, it’s extremely likely that someone will want the asset. During our 1st decade at FC, we’ve seen portfolio co’s acquired by:

🛒 Supermarkets
🚘 Automakers
🏦 Banks
🏭 Industrial Manufacturers
👨‍🌾 Agribusinesses

/3

That’s in addition to the usual suspects like Apple/Google/Facebook/Amazon, other tech giants, private equity firms, ad holding companies, and so on.

Software has eaten the world. Every company is now a tech company. There’s more buyers of startups than ever before.

/4

There are legitimate concerns about unusual acquirers:

👛 They usually offer lower multiples
🐌 Buy fewer companies overall
🗿Tend to prefer more mature startups

But it’s not like traditional buyers are without warts...

/5

Tech buyers have a tendency to:

☕️ Use their market power to grind down the price
🖍️ Redraw cap tables to misalign stakeholders
📻 Go radio silent unexpectedly and suddenly

/6

Be prepared to help educate VCs about potential exits, while not focusing the discussion on this topic. A big market is more important than an obvious buyer. If you get big enough, the public markets can provide an exit. The livery car industry provides a prime example.

/7

Speaking of the livery car industry, most VCs are awful at sizing markets. See why market sizing is so challenging from this market analysis of Uber already 4 years into their market expansion & imagine what it was like to size the market at the start. aswathdamodaran.blogspot.com/2014/06/a-disr…

/8

VCs will engage in top-down or bottom-up analysis, but they mostly use other large transactions in the market to convince themselves. Once a company has sold for $1B in the market, it’s a great market. Until that happens, it isn’t.

/9

While I advise against a slide highlighting potential acquirers or exit opportunities, it is a useful backup slide if you’re pitching a startup in an atypical space. You can break it out when an investor starts doubting the possibility of a strong exit in your industry.

/10

Many “atypical” markets are surprisingly M&A friendly, but the majority of VCs may not recognize the potential buyers without guidance. And if you’re working on something weird & wonderful, we’d love to talk.

/end #CollectiveWisdom