SaaStr 793: The 10-Point Checklist For When You Sell Your Company with David Frankel Managing Partner at Founder Collective and SaaStr CEO and Founder Jason Lemkin

0:00Welcome to the official Sastr podcast where you can hear some of the best Sastr speakers. This is where the cloud meets. Up today on the Saster Podcast. Just remember, when you do have M &A discussions with companies, you're being bought to solve a problem. The problem might be a feature gap. The problem might be I got three years behind. The problem might be I'm going to miss the quarter. The problem might be, it might be a positive problem, but I want to use leverage on my model to combine two companies. But you're like, the advantage to M &A is it's a quick fix to a problem. an often flawed fix and hair on it.

0:38But like you can, an executive or CEO in a matter of weeks can solve a problem that otherwise would take years or maybe impossible to solve. So if you want to get acquired, be the solution. Like, no, no, listen, be the solution, listen, and then figure out what problem you want to solve and sell yourself as the solution.

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3:02Welcome, everyone. We have a great session today. David Frankel, managing partner of Founder Collective. Founder Collective is probably one of the most jaw-dropping, successful seed funds that maybe has a slightly lower profile than folks that shout from the roof every day on social media. So we'll chat about that. incredible companies from the Trade Desk to Olo to Coupang to like just, and I want to briefly talk about David about investing. But the other day he wrote something on Twitter on a niche topic. It is a niche topic, but it's so important to founders. And he wrote up his 10 point checklist on what to use when you sell your company.

3:44And I thought in all the years I've been doing, this was the best thing I've seen on M &A, on selling your company, the best thing. It is a topic that is standard. You don't have to obsess about every hour, but I like his checklist so much. I put together a Saster post on it with my learnings because I wanted you to dust this off when you get that email, when you get that call. And I want everyone to know just enough about this to be smart, right? And the reality is, look, we've had five IPOs in B2B since 2021. So if you're going to have an exit someday, it's probably going to be M &A, David. Yeah.

4:16And Jason, thanks so much for noticing that post and for having me alongside. I've been reading your stuff for years, right? Truly, you're a SaaS legend. And there are very few VCs who, for so many years, have been like teachers, not bankers. And I count you amongst them. So it's a great pleasure to be here with you. Yes. And tell us just, I'll tell you, listen, I've been following the partners at Founder Collective since I started to get on social media. The deal that made my jaw fall off for founders was the trade desk, though, on this slide. These are some good ones, right? We can talk about Uber and Coupang and all these, but the trade desk from both a founder and a VC perspective is the gem we all dream of.

5:00Basically, one and a half rounds led by you guys and both owning 20%. Harder to do today, right? Harder to do today. And that was about all the company needed. I know it had a slightly rough quarter, but basically like 38 straight quarters of execution worth tens of billions of dollars today. That's in its own way. It's like one of the greatest VC investments of all time, isn't it? Yeah, it is all credit to Eric Paley, my founding partner, and he's one of the most humble, brilliant people you've ever met, I think, Eric. And he stuck with it. Traders, we broke the rules. We wrote a significant initial check, but then they were out of money and there was no money.

5:40And like we were committed, fund one was a literally zero reserve fund. There was no follow on, zero. Like when we said we were seed and pre-seed, that's exactly it. And we had no choice. And rear view mirror, Eric, it's just mind blowing. Eric was on the board of the trade desk till about, I think about a year and a half ago, two years ago. We owned roughly 12 % at IPO. And frankly, going into this topic, trade desk is one of the reasons I think we're going going to talk about selling companies, but the disclaimer is I hate selling. I hate selling anything, actually. I look in the rearview mirror and I go, everything I've sold pretty much has been a mistake.

6:19So I'm a contrarian. I've been through enough sales processes to try to figure out what works and what doesn't if you're in that process. But Eric, I have the most amazing partners. Eric did Uber, The Trade Desk, and Whoop. Not on this, but our new spate, Micah did Vokada, which just got a huge valuation and is the winning company in that space. Yeah. It's all obvious, but so hard to execute. Between them and what Amanda's doing and Joe, I feel like the luckiest partner on the planet. That's for sure. Pretty lucky. So I want to talk about M &A, but to frame the discussion, then let's go through the 10 points that you made.

6:54You said something that I have, in the last 18 months, I've changed my mind on, which is a little bit. Or at least I would say like many things, I've gotten more gray than black and white, which is that all the ones that you sold, you wish they didn't sell, right? You've seen, and I'm going to assume the reason why is you saw that growth go later, right? You saw part of the reason Sastra was written is I had these regrets of selling. I sold the business at a million a month growing up to 100 % with 110 % in our, that was cashflow positive. You would never sell a business like that today, right?

7:26And I saw it even while its market share decline still grow to$250 million, even neglected. That's the power of recurring revenue from$12 to$250. But what I learned, I've learned a lot of lessons from the 2021 boom. And I also learned some of them should have taken the offer. Some of them should have taken the offer. Yeah, we've all got those. I think market timing is incredibly difficult. and just to your point, overcoming the initial inertia, making the mistakes, galvanizing the team and having this team where you trust each other and you believe in each other's competence and you keep on growing.

8:01It's very hard to get paid for that growth. And then even if your growth has gotten flattened out, but you've got some kind of sight lines to the next inflection. To me, I often advise founders like, take a three week break. And if you need more, take two months, take a sabbatical, come back because so often folks are just too tired. They're tired or they're, I don't know, they're bored. They're not energized enough. And it's just easy to stare down what you have and totally take it for granted. Yeah, for sure. It used to be, when I started this astrocythe, I would track a lot of M &A back then.

8:36And I found that so much M &A happened around year five because that's, you start to get really tired after four years. And then a decent offer comes in around five and it's enough. Like it's more, sometimes it's more on an apps quietly on an absolute basis than you need as a founder. Forget about the VC side. And a lot. And in fact, there is a very well-known VC firm that a few years ago had a practice to buy founders around five years. They actually went in tactically, a multi-billion dollar VC fund that kind of had a PE-like element and they would try to buy out. And year five was their magic moment.

9:10Because it's PE, it's fantastic PE fodder. Look, the obvious tactic, and we use this a lot, is just encourage the founders in, particularly if it's a particularly valuable round, is just take 10 % off the table, right? Yeah. Risk yourself, take pressure off yourself. But I listened to you, and I think in my very first business in my early 20s, my partners and I were offered$5 million by Sprint to buy the business. So grateful we said no. Olo, PayPal offered to buy the business. PayPal came in and made$100 million offer. And literally, it was like Christmas. And that deal fell through. Noah and I were very disappointed.

9:50I remember on the 29th of December, they offered to invest$5 million at$100 million. We took the money. We bought them out pre the IPO. But you look back and you go, the favors that were done to us, when it's like these things fell through and we were left to continue to accrete. and in these creative growth situations, if nothing else, and it plays into our discussion to be had now, is think of that as an alternative. Think of the worst alternative is you keep on growing and owning your fantastic business. Yes, I think so. I think for what it's worth, then let's get into your points. My only nuances today are one, and I just went through this with the founder that had a similar Olo type deal, much bigger, but just went through it.

10:36And I asked him this, I said, I boiled it down to them. I said, listen, how badly do you want it? Because the IPO, I'm going to simplify the IPO bar today is 50 % growth at 500 million. Okay. Now that's not a billion dollar IPO. That's a much bigger IPO. If you're all in on that, if you can smell it, if you can taste it, if you can feel it, say no. But if you're not sure, take a couple of weeks to your point and maybe take the deal. I know it's hard. That's just my nuance because the outcomes are bigger, but the bar is higher. And I want you to want it, right? You got to want it because I just think in the other thing in the age, I believe in this recurring revenue, it's called Saster, right?

11:15But I think we're in an age now where AI is fueling so many competitors that if you don't want it badly enough, you're going to fall behind in a way you didn't used to. I believe you're going to fall behind, right? I think there's always that risk. But to one of your earlier points, we look at what founders want to do all day long, right? And if our founders say we want to sell and we think those are really coherent and good reasons, right? Like you have no choice, but often there is an investor on the cap table that's been there for a long time and their model, it's like the tail wagging the dog here.

11:45Their model is they need to see some liquidity for the next fund. So they're often very problematic reasons. But they get us to the point where if you're going to sell, then I think there is a checklist and I think there is a way of optimizing that. Yeah, it was. Now, wanting into the checklist, one of the many mistakes I made as a founder in M &A, and I think it would be, I don't know if it would be different today, I think it would be different today, is I was scared of my VCs. My first startup, I had years of runway. My second startup, we went cash flow positive at 5 million. So I wasn't scared of the VCs in the sense that I had to listen to their edicts.

12:18But I was scared they would block any M &A. I was scared that they would narrow my options. I was scared they would say no to everything. and it clouded my way of thinking about it in ways it shouldn't have, right? That there is this VC mantra that if the founders want to sell, you should sell, right? And I think the founders should find out if it's true. Maybe they should ask if they're worried. Yeah. And I think the different incentives play a lot, right? Because I have this view, if you're growing and you just keep growing, right? Like really keep growing and see where this thing goes. But again, there are other timetables at play.

13:00And founders get tired. We've all been through it. Founders get really tired. And then they also have people around them. They have CFOs. They have CEOs who are saying it could be time. You see that big gig. And sometimes the mistake we make is we take pressure out of the system by giving the founders some kind of liquidity, but we don't think enough about the rest of the team. And then the team's playing on the founders. Even that growth, even that nonstop growth comes at a price. and you're lucky to have it. But I've seen most of the situations I've been in, and I regret so many situations that I've sold in.

13:33Media Radar is a great example. New York-based, one of the biggest media sales, SaaS businesses, Todd Kreiselman, is it got time for some of the investors. And Bain, Scott Friend was in that with us, and Bain had been in it for many years, had been very patient. And at some point, they're going, it's time. And I think that's where many VC funds, many investors don't have the ability structurally to go, I'm going to keep this going. So in a fund one or a fund two, we can do that all day long. We can say, look, we provided a lot of liquidity to our LPs. They'll trust us in these situations. And frankly, there've been situations where we've thought of, we've done it less than we thought of it, but is of just rolling with the next set of investors.

14:18Yeah. Okay. So let's, this is the checklist. Again, on Saster, I wrote up all of David's point, then I added a few anecdotes on it on this post. Whenever you get into this 10-point checklist, and we'll keep updating it, I would like it to be a canonical piece of content to help founders. This first one, so let's go through them, but this one takes a while to understand buyer motivations, know what they're buying. Do a little bit more of a deep dive here. In practice, what have you seen? Yeah, so I think you really do have to understand, and it comes from listening and speaking and engaging with buyers.

14:53And hopefully what you've had the opportunity to do is have those conversations before the moment where you say, my company is for sale. So you actually know what you're going to plug there. And I do think that if you have this luxury, you've got to tailor your pitch for those different buyers. An example could be Amazon PillPack, where really, I think what Amazon was ultimately interested in was the software system. We thought that the packaging, the robotic packaging, and the delivery mechanism was incredibly novel. And it was. But the reality was, Amazon could replicate that and make it better in a heartbeat.

15:35That wasn't what they needed. But the spaghetti between the providers and the insurers and the PBMs, so the pharmacy benefit managers, actually making that system coherent and making it work with multiple stakeholders, that was a huge software effort. And it is Amazon Pharmacy today. It's literally based on that pill pack code. And we always look at that as this was just an enabler, right? The real business was what the consumer saw in the consumer packaging and messaging, and we had to get that right. But that was what Amazon was interested in. So tailoring and understanding that makes a huge difference.

16:13In some cases, you need to look at your people and go, it's very difficult to put this team together. What they're actually doing is they're interested in us for an acqui-hire. And these can be very expensive acqui-hires. You look at the Google character deal, right? Off the charts, yeah. So it's very difficult to put this group of 5, 6, 10, 20 people together, and that's what they're interested in. Understanding that motivation, I think, is a step change, right? Because you then have the emotional intelligence to understand what's their willingness to pay, how aligned are we. If they're looking at this as a cheap apple hire and we think we want this as a multiple of our revenues, we're totally mismatched.

16:56And I think that's how, particularly in larger situations when you hire bankers, that's how you keep the bankers honest. And that sounds almost negative. That's how you work with the bankers. That's how you empower the bankers. And that's how you become a kind of team that gets to the finish line. But understanding what each acquirer, because typically there are multiple acquirers. There could be people who value you from a fintech perspective. There could be people who value you from a SaaS perspective. There could be companies who view their lineup as boring, right? But understanding why they invested and what they're interested in matters, right?

17:33So it comes down to listening. I think it's listening, asking. And one little tell I just was thinking live in the meetings I've been at, watch who they bring to the early meetings. If they drag a very technical leader, right? It's a sign, right? It's a sign, right? If they bring a GM of the business unit or something, they're going to care about your revenue, right? If they bring the CTO at your tech, who they bring, because they want to socialize the deal or get opinions or decide, right? When I'm looking back, that extra person in the back of the room has been very telling on what they want to buy here, right?

18:10And then sometimes it's more obvious than other times, like really understanding the motivations of your buyer. What is your buyer trying to do? What is their thesis? how do you play into their thesis matters? Yeah, I think the key takeaway here is align the pitch to which of these three they really want. And so often, the short-term revenue of the target is immaterial to the acquirer. What is Amazon doing in revenue today? It doesn't matter who they buy. The further you are on the PE spectrum, probably the more important revenue is. But whatever it is, you got to listen. It's often different than we think.

18:42And even understanding, okay, so what are the buyer's alternatives to you as a target? And could someone be a better fit? So understanding your dynamics and your desirability matters too. And that's, by the way, that goes to trying to build something that is distinctive, that has a moat for all the reasons that you should build anyway. But certainly that stares you in the face when you're looking at M &A. Yeah. This one's the next one. Share the story. Fully commit to the process. Selling's highly distracting. Don't proceed unless you're all in. I do think you have to take baby steps to learn, right?

19:21There is a line, right, where it's not that. One meeting is not a huge distraction, is it? But share your learnings here. Yeah. So just in fairness, this is size and this is size dependent, right? Some of what I will say is when you've got a CEO that has a really good C-suite that's built out and that CEO is not frontline selling and they've got a fantastic COO and CFO, then it's easier to commit to a process, right? It's easier to spend time on a process. If you're in year three and it's still like founder-led sales and you don't have your team built out as much, then the cost of the distraction can be that much higher.

20:03But it's even like fundraising. is I see people taking one meeting and then one fund says they're interested, but you never had any other funds involved and that just takes on a life of its own. Any process, think hard about whether you want to go. And if you do want to go, understand that it's going to take time. Some of the best fundraisers I've seen say, I'm going to effectively take three weeks off my business and I'm going to raise this round. M &A, you've put so much time and effort into building your company, into putting this team together, they're energizing the team, you name it, every aspect of building.

20:38And yet you're going to half-ass your sales process, like arguably one of the most important things in your life. And I see it done. So I think the fact is it's not just the founders that have to be fully committed and aligned and in agreement, but it's your top people. And there's a balancing act here between how many people know about it and leaks, but your top, arguably your CFO, your COO, your top people who are going to be involved in diligence need to be committed, need to put time aside and need to drive that process. Otherwise, you're doing yourself an enormous disservice. And these processes take tremendous time.

21:18Yeah. This one I put up, if folks want to watch, I interviewed Ben Chestnut at Sastrano right after they sold MailChimp to 12 billion into it. There are actually a lot of learnings, but one is they had a deal before that that fell apart and it almost destroyed the team, he said, going to your point. It really resonated. Almost destroyed the team. They thought this deal was going to happen. It consumed a year. And then the deal with Intuit took a full year. It took a full year, right, to happen, right, from the beginning to end. So that's two years on this journey. And it was just burned into them how much that first one falling apart almost just wrecked the team.

21:51It was so distracting. And then it didn't happen. Smaller deals don't always, they can take two years, actually, one-on-one. But it is, it was, this happens all the time, versions of this. There are many reasons also that are outside of the team that those fall apart. Many reasons. If you look at like the Amazon iRobot, that was a regulatory reason last year that fell apart. But wow, that hasn't destroyed the company. But wow, that has been a huge value loss situation with people leaving. Drumming into the people who are involved in that sales process. Forget even creating competition. Our other alternative is we just say this was not the right time and we're going to continue to grow this business.

22:36You've got customers have to believe that as well. So you have to go, look, we tried. We had some very interesting inbound. It was tough not to like take it seriously. And yeah, we just figured out this was really easier said than done this. But I know it like the team gets so into it. It's just tough. Yeah. Another related point, and then let's hit the next one is that brings up to your point is what you don't fully realize until you've been out on the other side, until I was a VP at Adobe or saw a few times is on fully committed is almost every corporation, even at the CEO level, the priorities change every year.

23:11So you talked about deals falling apart for a regulatory, like, oh, another reason deals falls apart, the SVP leaves or is fired. That's actually a top reason for like sub billion dollar deals is the head of the business unit retires or is kicked down or is fired, all of a sudden, it's not on his or her priority list. And even at the CEO, it changes. It's even at the CEO, it changes. I so grok with that. I so grok with that. We've seen that time and time again. Exactly the point, actually, the CEO is being fired and the board knew, but you go, what's wrong with me? And in the rear view mirror, you see the CEO is being fired.

23:46Or you go, why were... So we put up a satellite with Intel set. This is in another a lifetime. We own 25%. Intel set on 75%. The leadership who we thought were pretty great there, we dealt with the COO all the time. They just put the screws on this partnership all day long. And six months after you've exited, you got what was going on there. And they just said, look, we had our new PE investors, the level of pressure that was being put on us on every single project. And you don't know about that. So at some point you've got to remember that as well. Remember that there are facts and circumstances that are extraneous to your little deal, right?

24:27In inverted commas, your world, right? That you don't have a handle on. And maybe that in itself is a reason to say, take a moment here and pull out. Yeah, for sure. Okay. Manage team expectations. We probably hit this one before. It's as simple as manage their, don't let them start planning their new Tesla or beach homes or anything actually beyond that. It's a bit of many a slip between the cup and the lip. This is a 3%. Just because we're going into play doesn't mean we'll get it done. Doesn't mean we'll get it done now. And the default is you have a job at a company that is hopefully doing well.