A critical part of the CEO’s job is realizing when it’s time to sell the company. I’m not talking about the easy cases, like when you’re in year five of running a PE-backed company, and the numbers suggest an exit that produces a 3x+ return. Everyone knows the point was to sell the company one day and that PE generally wants a 3-5x return in 4-6 years. So saying, “it’s time to sell” in this scenario has all the shock value of saying, “it’s six o-clock, I guess I should get started cooking dinner.”
I’m talking about the much more difficult case where the company is performing well financially, but the CEO sees storm clouds on the horizon that indicate the future will quite probably not be as rosy as the past.
Four things combine to make this a difficult conversation:
- There is no data to suggest the firm is in trouble. In fact, the data suggests quite the opposite, that the future is bright. Think: “You’re on the same trajectory as our best-in-class firms.”
- The storm clouds are unfavorable trends, not performance problems. But by the time those trends manifest as performance problems, it may well be too late to get a decent valuation for the firm.
- Your viewpoint will likely be interpreted as self-interested. “What Joe’s really saying is that he wants to cash out.” Or, “Joe’s lost faith in the company because he’s lost confidence in his ability to lead it.” Conclusion: “We need someone running this company who believes in its future and who is capable of taking it to $250M.” Adios Joe. Even though poor old Joe never actually said either of those things.
- The “hits” nature of the VC business. Selling a winner early can have a devastating impact on the IRR of a fund (e.g., removing the top two performers can change a fund’s IRR from 35% to 12%. Think: “There’s no way we’re taking a double on this investment when I think this can be a home run. I’d rather get thrown out sliding into third.”
The incentives are all wrong. The VCs can’t see the problem in the data because it’s not impacting performance yet. They often don’t want to see the problem because the company may be one of a few winners in the portfolio that they’re hoping will return the fund. It’s very easy for the CEO in this situation to get fired. Think: “If I believed this could be a $1B company despite these storm clouds, then I’d want to fire me, too. But I don’t.”
The ultimate problem is that you can’t see around corners when you’re only looking at performance metrics. Even leading indicators like pipeline won’t be leading enough to show these problems. The best chance of seeing the problem in the data is if a few of your earliest, most visionary customers have moved onto the new thing. But due to switching costs, this doesn’t often happen. Other companies, who skipped your generation of technology, are more likely to be the first adopters of the new, new thing.
For founder/CEOs, recognizing the situation is even more difficult than for hired CEOs because:
- The founder’s inbuilt reality distortion field. Founders are gifted at willing the world into what they want it to be. This is awesome for driving disruptive visions. It is dangerous when used to imagine away a harsh reality.
- The “they said we couldn’t get this far” fallacy. Founders have been told so many times by so many people that, “you’ll never be able to do X” that when faced with stated obstacles they immediately rationalize them away. They said we’d never get PMF. They said we’d never get to $1M in ARR. They said the megavendors would crush us. They said we’d never be able to hit $10M. They said we’d never be able to sell enterprise. They said we’d never get to $50M. Most of the time, this obduracy is helpful. Except for the one time when “they” are right.
The are two morals here. First, founders need to try to objectively evaluate facts and disable their knee-jerk, “they said we never could do X” reflex. Second, boards — knowing how difficult it is for a founder to reach the conclusion that they may be in a Kobayashi Maru scenario — should immediately perk up when they hear a founder say that they might be.
To make this concrete, let’s provide a few examples of these storm clouds. I’m not talking about a squall here, I’m talking about clouds that presage a full-blown typhoon:
- Megavendors entering the category. Worst case, they give away their equivalent of your product to sell their own core product. But even when they sell an entry in your category, they may do so at a lower price. This begs the questions: How much is your differentiation really worth? At what price point can you still compete? How much is your neutrality worth compared to the integrated solution? Examples: Microsoft Power BI, Databricks Unity Catalog.
- Omission from a category consolidation. When a best-of-breed category is transformed into a suite by the market leaders, such as the integration of query, reporting, and OLAP in the 2000s, or the integration of conversation intelligence, forecasting, and sales engagement today. Actuate was left behind the first example, Fireflies might well be in the second. In rare cases, the neutrality of vendor independence is valued (e.g., Informatica) but, most of the time, the standalone solutions end up neither best-of-breed nor integrated.
- Category superannuation. The category is crushed by indirect competition that replaces it. For example, what many see AI doing to RPA today. Or MarkLogic (an XML database), which was superannuated by NoSQL. You don’t get beaten by a direct competitor, but simply replaced by a new category of software that does what you do as a subset.
- Imminent commoditization. While lazy marketers bandy this term about too freely, sometimes categories do commoditize either in the sense of a lack of differentiation among alternatives or, more commonly, price pressure brought about by loss-leader entries from megavendors or open source alternatives. You still offer something of value, but customers can get roughly the same thing elsewhere for free or nearly so.
Why do I call this a paradox? Because, unless you’re a founder with control provisions, it’s very easy to get fired just by starting the conversation. Can you ever tell the board that it’s time to sell a high-performing company without getting fired for doing so?
Having failed at this once myself, “perhaps” is my best answer. Here’s what I would recommend to maximize your odds of being able to successfully lead this conversation:
- Get the technical founder(s) on board first. If they don’t believe the industry changes are an existential threat, the whole debate may be impossible.
- Go slowly. Don’t drop the whole idea on the board in one fell swoop. Instead, signal over a series of board meetings that there is a potential storm brewing. This isn’t always possible (e.g., a surprise megavendor entry), but it usually is.
- Lead the horse to water. Ask questions, don’t make statements. Understand that saying, “I think we need to sell the company” is a bell that you cannot unring — so don’t say it. (Yet at least.) Use my formula for having meaningful strategic board discussions.
- Never signal any personal interests. Never talk about personal liquidity or your ability to scale the company, lest any comment made will never be forgotten. Always just talk about the business, its health, and its value.
- Bring data. Analyst reports, megavendor speeches, customer interviews, and buying intent surveys can all help show people what’s happening.
- Do business development. You do not need the board’s permission to build relationships with potential strategic acquirers, particularly when the context is strategic alliances, OEM distribution, or potential investment. (You should be doing this anyway.) This gets the lines open if and when the board does decide to explore options.
- Leverage personal relationships. Build and use your 1-1 relationships with board members to have these tricky conversations, particularly with the “lead” or “alpha” director.
- Be open to alternatives. If people raise valid pivot strategies, consider them openly. Never appear wedded to a given solution (e.g., sell the company) particularly when your ability to execute it is beyond your control.
- Leverage independent directors and advisors. Hopefully these individuals can be more objective in evaluating the firm’s situation and offer wise counsel on how to proceed.
- Watch your back. Try to detect if board members start meeting without you, e.g., by staying close to the founders or select board members you know and trust well.
I think selling a high-performing company in the face of a brewing storm is among the hardest tasks a CEO can undertake. Hopefully, in this post, I’ve provided a few good ideas for what to do if you find yourself in this situation.
