Early-stage founders should identify potential acquirers from day one, then research their past deals to set realistic exit prices. Overvaluation is a common killer: it dilutes investor returns and can leave founders with nothing after liquidation preferences, turning the company into a lifestyle business instead of a sellable one.
So let's say they've listened to this, they embrace the belief, okay, I need to figure out an acquisition strategy. How do you actually go about that before you've really even built?
So let's say you're starting a company. The first thing you do is you say, okay, what sort of companies out there would I think are a good acquirer of the idea that I have? You haven't gone anywhere past that, right? But you're like an idea. Next question you ask yourself is, what does the customer look like? Okay. What other things like my product does this same customer buy from other companies? And then that's the beginning. And then you'd sort of like just track it down like a, you know, like a dog, right? Just track it down and say, okay, next, do they have the same customer match? Okay. Next, have they acquired companies? Ooh. Next, when did they acquire the company? How much did they pay for those companies? Right? Which is another thing. If you don't know approximately how much you're going for when you sell your company, you're a victim of becoming overvalued. And what that means simply is an overvaluation is one of the biggest reasons why founders fail. And what that means simply put is if you are building a company long-term and you get out there and you're like, I'm raising a $1 million at a $10 million valuation, and the acquirers have purchased companies like yours for $15 million, there's only $5 million in arbitrage, meaning there's $5 million for investors to make over what the value of the company is and the exit value. So every time they're giving you money, they're— the amount of money they're going to make off of their investment is going to be shrinking because of dilution. So if you sit there and you say, okay, well, I don't know how much I'm going to sell for, how do you know if you're overvalued? You don't because you haven't done the homework to see if you're overvalued, right? So you could see like just this one concept of not planning with the end in mind from the very beginning, you know, the Stephen Covey famous thing, then you are literally setting yourself up for failure. It may not happen in a year, It may not happen in 2 years, but it'll happen eventually. You won't be able to sell your company. It'll become a lifestyle company.
Well, I think one of the saddest scenarios that I've seen is when a founder actually sells their company for a good chunk of change and they walk away with nothing from it because they were overvalued early on. And so by the time liquidation preferences are done, the investors got what's theirs and the founder wasn't left with anything.
And that's, and that's really common. Like, that's, that's pretty common.
