The unexpected lessons of selling a startup: Modelbit founder shares lessons on why relationships matter more than money
Harry Glaser is the CEO and co-founder of Modelbit, a San Francisco-based startup dedicated to simplifying the deployment and management of models in production for data scientists. Co-founded with his friend and CTO Tom O’Neill in 2021, Modelbit empowers data scientists by providing a straightforward solution that allows them to push their models to production without the need for machine learning (ML) Engineers.
In his reflective piece titled, “What I learned selling my company,” Glaser shared valuable insights gained from the experience. Initially adhering to the common advice of not focusing on mergers and acquisitions (M&A), Glaser emphasizes the importance of understanding this aspect of entrepreneurship. His $130M acquisition story was a positive turn for the founders and employees, with reasonable outcomes for investors.
Challenging the conventional advice of simply growing the business, Glaser asserts that founders often enter the startup world with the aspiration of a lucrative exit, and M&A is a pathway to that goal. The article delves into the nuances of mid/late-stage startup acquisitions in the $50M-$500M range, emphasizing the need to build key relationships with potential acquirers early on.
The key decision-makers in M&A, according to Glaser, are top business leaders, including VPs/SVPs of business units at big tech and CEOs of pre/post-IPO tech companies. He advises against raising funds ahead of the company’s fundamentals, as the post-money valuation sets a floor on the sale price. Glaser draws from personal experience at Periscope Data, highlighting the importance of strategic decisions during fundraising.
Addressing the infrequent nature of acquisition offers, Glaser dispels the misconception that a seemingly stalled business could easily sell. Offers, he notes, are generated by events at the acquirer, events that are often mysterious to the startup being acquired. Understanding the optical reasons behind an offer is crucial for successful negotiations.
The article stresses the small chance of offer closures and recommends trying to generate competing offers from key relationships once an offer is received. Glaser advises negotiating everything possible in the Letter of Intent (LOI) itself, as it marks the point of exclusivity, eliminating leverage for the startup.
Delving into the complexities of tax implications in deals, Glaser emphasizes the need for CEOs to understand these intricacies. He advises minimizing the number of people aware of the acquisition process to prevent distraction and maintaining focus on running the business until the deal is closed.
A realistic view of the potential downsides of M&A is presented, urging founders to consider the possibility of failed integration, employee churn, and missed targets. Glaser underscores the impact of one’s conduct during the process on reputation and the importance of holding the line to ensure fairness for investors and ex-employees.
The article concludes with insights into the emotional aspects of announcement day, where celebrations and tears coexist. Glaser acknowledges the challenging years that follow the acquisition, with the reminder that the intentional decision to sell comes with the responsibility of steering the company through the transition for the benefit of all stakeholders.
Lessons Learned From Selling a Startup
Below are the summary and key takeaways from Glaser’s piece:
- Build 3-4 key relationships with potential acquirers to establish trust over time.
- Focus on relationships with top business leaders for M&A decisions, such as CEOs and VPs/SVPs of business units.
- Avoid raising funds ahead of fundamentals to prevent setting a high sale floor; consider the business’s strength before accepting a large round.
- Offers come infrequently, and the lack of buyers, not business value, maybe the reason for a seemingly stalled business not selling.
- Offers are generated by events at the acquirer, and understanding the optical reasons behind an offer is crucial for successful negotiations.
- Offers have a small chance of closing; aim to generate competing offers from key relationships once an offer is received.
- Negotiate crucial terms in the LOI itself, as it gives the acquirer exclusivity, eliminating leverage for the startup.
- Understand the tax implications of the deal to comprehend the overall deal better.
- Minimize who knows about the acquisition process to avoid distraction and maintain focus on running the business until close day.
- Keep running the business until close day, as offers can blow up, and failure to recover from failed M&A processes is common.
- Consider the potential downsides of M&A, such as failed integration, employee churn, and missed targets, before deciding.
- Conduct yourself ethically during the process, holding the line to ensure fairness for all stakeholders.
- On announcement day, acknowledge both celebrations and emotional moments and prioritize validating the celebration and supporting those who may be affected negatively.
- Understand that selling your company means signing up for a couple of hard years, as the transition can be stressful, and you may need to put on a brave face for the benefit of everyone involved.