5 Common Misconceptions Founders Have About Selling A Startup

Since December 2023, we've spoken to over 150 investors looking to acquire startups and over 200 founders interested in selling their startup, and have facilitated over 90 introductions between them. We noticed a lot of the same questions come up from founders, often based on information they hear from friends. I wanted to clear up some common misconceptions and add a bit more nuance to the conversation in an area where founders are often reticent to talk about publicly.

1. Startups are bought, not sold

The M&A marketplace mirrors the online dating marketplace in many ways - one obvious parallel is that one side of the marketplace is expected to make the first move. Being too eager to talk to buyers can give off a negative signal, so founders often wait to be approached even when they're actively looking to get acquired.

So while it's true that top startups wait for buyers to make the first move, it doesn't mean founders should just wait around hoping for something to happen. There's plenty of ways to increase the odds of getting on a acquirer's radar:

• Founders can work with an advisor or investment bank to reach out to buyers on their behalf. An intermediary can play good cop, ensuring buyers are engaged without founders putting inordinate time and effort into the process.

• Founders can post frequently about their product and milestones. This makes them more visible to larger competitors, and can help put pressure on competitors to broach potential "partnership opportunities".

• Founders can talk to their investors about what an exit would look like. VCs often make multiple investments in the same vertical, and can facilitate warm introductions to other portfolio companies. Plus, there's a strong incentive for VCs because if an acquisition does happen, they get to convert equity in the weaker company to equity in a stronger one.

2. There's a fair market price for every startup

One of the first questions many founder ask us is what we think their startup is "worth". This is the wrong question to ask, the first question should be "who would buy my startup?" Only after answering that question does it make sense to ask "what is it worth to them?"

For example, financial buyers won't buy a startup burning $100k per month even if the price is $1, but a strategic buyer might pay $10mm for the same company because it would cost them twice as much to build the product and hire the team.

Knowing who your potential buyers are will allow you to run a more targeted process, so you're spending time with the right buyers and maximizing your odds of getting top offers.

3. It's impossible to make money on an exit if you raised too much venture capital

The VC model requires investors to pursue 10 figure outcomes against all odds, so they are incentivized to push a narrative that selling at 7 to 8 figures is a waste of time for founders.

In reality, if revenues are at least half of total funding raised, founders can usually clear their pref stack and get rewarded. Even in cases where the cap table is upside down, founders may be able to negotiate a carve-out for themselves. After all, if every possibility has been exhausted and a majority of shareholders are onboard with a sale, they'll want founders to be motivated to sell for the highest possible price.

And as founders, regardless of the financial upside, spending 5 years for a 1% chance of success may not be the best use of their time.

4. You have to have more than $5mm in revenue to sell a venture backed startup

Many founders don't even consider an exit before Series B, because the traditional advice is that nobody wants to buy an early stage startup. However, there are thousands of software companies each year that get acquired for 7 to low 8 figures, so it's clearly a thriving marketplace.

The real reason it's hard for founders with <$5mm in revenue to exit is because there aren't good advisors and investment banks to help with transactions under $50mm. For example, the fee for facilitating an $8mm transaction work out to just $200k-$500k, which barely covers legal fees and doesn't align with the cost structure of traditional investment banks. And founders themselves are too busy to run a full M&A process themselves in parallel to running a company.

We built Dealwise to fill this gap, helping seed to Series A founders exit without having to pay exorbitant fees to investment banks.

5. Private equity firms only acquire big companies, not startups

PE firms often make the news cycle for multi billion dollar acquisitions of public companies. What many don't know is that a quarter of PE buyouts are deals under $100m and the majority of acquisitions are for add-ons that are much smaller than the blockbuster deals reported in the news.

The PE industry is also structured hierarchically, with capital flowing from LPs like pension funds, endowments, HNWIs, etc to individual funds and fund-of-funds. Some GPs manage funds as small as $50mm, specifically pursing 7 figure deals and helping vive LPs exposure to all segments of the market.

These micro funds are especially prevalent in the software industry, where companies can grow quickly and where there is still less competition from more traditional PE firms.

Get Offers on Dealwise

We're not M&A advisors - we're a YC-backed startup on a mission to help seed to series A founders optimize their exits. We launched just 45 days ago and are already making 30 introductions between founders and prospective acquirers each week, with two startups under offer. If you're a founder looking to exit in the next 6 months, connect with me on LinkedIn and I'd be happy to walk you through our process.