💰 Five lessons I learned from selling my startup

Companies are bought, not sold.

Aug 17, 2023

If you haven’t read the earlier parts of this trilogy, check out Part 1 and Part 2.

Before selling Stream Club, my only experience with sales was flipping furniture on Craigslist. Surprisingly, this can often be the case for many first-time founders. Mergers and acquisitions don’t top the list of “things you need to know when building a startup.”

As Stream Club celebrated its first anniversary, we were six months into a pivot and steadily burning into the $2.1 million we had raised 12 months prior. This pivot was our last bullet. If we couldn’t find product-market fit, it seemed unlikely that we would be able to raise another round. I had a feeling that we needed a backup plan.

Lesson 1: Start looking for an acquisition long before you need to sell.

That backup plan began to reveal itself to me during a chance conversation with a supplier of ours. We had chosen Mux as our video infrastructure provider, and they became a crucial backbone of our software. One day, we hopped on a call with a product manager at Mux to review some new products they were working on. They had been building an exciting new product that would help with a significant pain point of ours. The problem? They were only solving half of our problem! Albeit, the much harder half.

Lesson 2: The best acquirer is often your biggest supplier or customer

When I learned about the new product from Mux, I couldn’t stop thinking about all the ways I wanted to extend it. I found inspiration from my time at Twilio (another infrastructure company) and drew parallels between the two businesses. As a customer of Mux, we had unique insights into their business, as they did into ours.

Mux was also a newly minted unicorn, with over $140 million in dry powder ready to be deployed to fuel its growth (and potential acquisitions). The timing of these conversations couldn’t have been better.

Instead of thinking about my roadmap, I started thinking about theirs. And I knew that Stream Club had the potential to leverage their new product and get a head start on building what felt like an inevitable part of Mux’s roadmap, The Product Platform.

Lesson 3: Partnerships are foreplay for an acquisition

As I fleshed out the strategy for Stream Club, it became more apparent that our roadmaps would intersect much sooner than I realized. I was convinced that a sizable business could be built by extending and reselling Mux’s existing infrastructure. We could sell to the same customers as them but at a higher level of abstraction. Customers who wanted a bespoke implementation would use Mux, but customers who wanted something less complex and prebuilt could use Stream Club. They were the Ikea furniture, and we were the assembly service.

An essential part of this strategy would be partnering with Mux to sell to their customer base. I wrote them a love letter, laying out all the reasons why I thought we would be great partners. It was incredibly effective. To this day, I think that was the single most important document I’ve written in Stream Club history.

Partnerships aren’t only great for building businesses; they’re vital for planting the seeds of acquisition: shared roadmap, shared customers, shared revenue, and shared values. If you have at least two of those, you have a solid shot at making an acquisition happen.

Lesson 4: Companies are bought, not sold.

While I was planting the seeds of an acquisition, my cofounder Lan was still pushing forward the continued development of our product. If our business stopped growing, we would have lost significant leverage in any future negotiation. We wanted to be bought, not sold, and nobody would buy a sinking ship.

We spent significant time building our relationship with the team before even signaling that we would be interested in M&A. It took us almost five months to go from our first meeting with Mux to an LOI. Most of that time was spent meeting with the team, sharing our technical insights, and building rapport. Like enterprise sales, you need to establish stakeholder support before your internal champion can even consider proposing a purchase.

Going back to lesson one, these deals can take a lot of time. If we didn’t have enough runway, we would have been out of business before we could even complete the transaction! Planning ahead gave us leverage and comfort in waiting for the right offer to be made.

Lesson 5: My price, your terms OR your price, my terms.

No matter how much leverage you build in negotiations, acquisitions of startups are inherently risky for the buyer. According to the Harvard Business Review, “between 70 and 90 percent of acquisitions fail”. Most competent buyers know this, and they’re going to be mindful of the amount of risk they open themselves up to via acquisitions.

When negotiating an acquisition, it's often "my price, your terms" or "your terms, my price.” In other words, you can anchor either on the valuation/deal price or the terms, but doing both is difficult. For us, we were willing to sacrifice on terms in order to get the price we felt was worthwhile for the team. A good negotiation means that both sides walk away feeling like they had to give something up.

For us, we prioritized outcomes in this order: Our team, our investors, and ourselves.

Our team had taken considerable risks to work with us at Stream Club, and we wanted to ensure their hard work was appropriately rewarded. We knew that they would be taken care of at Mux.

For our venture investors, we knew that any acquisition at this stage wouldn’t be the fund-returning win that they were hoping for. However, it felt right to negotiate hard on their behalf. In the end, it was their capital that got us here, not our own. They’ve remembered this and have continued to be in our corner since.

We wanted to ensure everyone was compensated fairly based on their contributions and the risks taken. As founders, we had already gained so much from the experience of building the company. So we accepted stricter personal terms around liability, earn-outs, and non-competes in order to allocate more value to our team and investors who deserved it.

Final thoughts

The acquisition process took an immense emotional toll on our team. Though I felt lucky to have my cofounder's support, the months of negotiation and uncertainty left us drained. I should have prioritized self-care more - taking time off, pursuing hobbies, not losing sight of personal needs amid the stress. Having alignment with my cofounder was also key during challenging decisions. We had to keep each other grounded on our shared priorities. After closing, the rollercoaster continued - relief to be done but sadness for what was lost, excitement for the future but unease about letting go. With support from friends and mentors, I was able to eventually find peace and appreciate the experience for what it taught me. For those going through an acquisition, remember to reflect on the journey once the dust settles. Be proud of seeing it through despite the difficulties. Use your learnings, rest up, and get ready for the next challenge ahead.