MARKETING

Six Tips for Building a Tech Company to Sell

It's far more prudent to build a company that has a 30% success rate than chase your dreams and bat .001 in the field. An organization's success shouldn't boost the ego of its founders, but should serve as a real responsibility to reward employees and investors for their hard work, financial risk, time and commitment. Here are a few practical dos and don’ts when building to sell.

Develop your passion. Do not follow it.

In our research, successful businesses are more often started as practical solutions than as passion projects. It may not be wise to “follow your passion” but to rather “develop one.” If your business is not focused on breakthrough, disruptive solutions but to simply add value to an enterprise, you should concentrate on your company's reputation for providing value.

Find an existing, growing category and be the fastest follower with a best-of-breed application. Don't try to create a category.

As a category creator, you're likely to experience faster growth and be valued more highly by investors than companies bringing incremental innovations to the market; however, the risks associated with this strategy are not aligned with a "build to sell" strategy. As a result, we realize that it's easier to focus on solving a problem you and your customers already recognize than to venture into uncharted waters just to gain a competitive advantage. A best-of-breed system is the best system in its referenced niche or category. This goal is to develop a deep solution application quickly for an existing, well-recognized problem and avoid becoming a pioneer who is vulnerable to being attacked by competitors.

Be fiscally responsible (while taking risks).

Startups need cash like astronauts need oxygen. Silicon Valley startups are notorious for their extravagant spending habits. People often justify them by pointing out that leaders need to attract and retain top talent with lavish perks and that investors hope for lucrative exits. It is likely that labor is the biggest expense for all tech startups, but you do not have to sacrifice quality when you hire potentially cheaper, geographically dispersed talent. It is also possible to save cash in marketing. A/B testing and retesting a variety of marketing strategies is a good way to take risks and be fiscally responsible. Once you've settled upon marketing strategies that produce desirable and reliable results, you may double down on them. This is especially true of paid search campaigns.

​​Bootstrap as long as you can.

A founder's equity is like casino chips to a gambler. Apart from the obvious need for startups to preserve their own equity for as long as possible. Bootstrapping forces you to get good fast.

Build a 'common' technology foundation.

Most likely, the organization that's interested in buying your best-of-breed tech startup will be most interested in your technology, as it may be looking to fill a gap in its own offerings. Although revenues, market share, and customer base are important, they are not likely to drive initial interest. Merging entities also depends on the success of integrating core systems, products, development teams, and the tools used to build these components. When you prepare for such synergies through thorough market research, you'll make sure that your team and you select a compatible tech stack from the get-go, and don't fall prey to cheaper or more exotic alternatives that may cause major issues when merger time comes.

Consider attracting a strategic investor.

Slack, Intel, and Microsoft, among other large companies with strong cash reserves, are forming their own investment fund to fund startups that will primarily drive value for the parent company. The benefits of this approach are that they may not be motivated by financial returns, can be less value-conscious, can be safe testing grounds for your product or service, have built-in sales and distribution channels, and may be the most serious acquirers once they realize your company can help them accomplish their objectives.

There are also some cons to this approach, as with anything else in business. The most obvious example is that a strategic investor may have a myopic view on the exit (for example, negotiating rights of first refusal to favor non-competing acquirers). Additionally, the investor may limit who you can sell your product or service to, as well as the timing of the exit. You should conduct your due diligence on whether or not the investor has assisted companies at your stage of development (for example, by interviewing other portfolio companies) and ensure that their goals are clearly aligned with yours. Building a successful business requires a lot of risk, effort, and time. An exit plan is crucial from the very beginning. By approaching your business from the perspective of an acquirer, you can become more disciplined, focused, and prepared for engagement at any point, which could result in a very nice payoff.